...the market forces of supply and demand are supposed to be the main factors in setting the prices for goods and services. But marketing comes into play as well. Supply and demand have little to do with a seller’s decision to price an item at $19.99 instead of 20 bucks.

The psychological trick of seeing a one instead of a two at the front of a price, as in $19.99 versus $20 can work to increase sales. But Robert Schindler, professor of Marketing at Rutgers School of Business-Camden, says that in some cases, the penny saved isn’t worth it.

The $19.99 technique may actually backfire when a consumer is most concerned about quality, say, in a luxury item. The penny-lower price can then raise questions in the buyer’s mind about quality. According the Schindler, in those cases, the full, round non-99 price may send a signal of a better buy.

From Scientific American 60 Second Science, 2011-Sep-07