Good question, it's an illusion created to make us think we're getting a bargain.
Studies have shown that people immediately focus on the dollar amount on the price tag. We all know it's only a penny difference, but the quick subconscious response is to go for the 1.99 item rather than the 2.00.
Here's another question along the same train of thought:
Why Do Gas Prices Always End in 9/10 of a Cent?
There are several theories to this. One is that is a marketing ploy in the gas price wars that go back more than 70 years. It is similar to other retail pricing like $19.99 rather than $20, or $29.99 rather than $30. It gives the appearance of being less expensive.
Another reason may be due to taxes, the 1933 increase in federal gasoline taxes from 1 cent per gallon to 1.5 cents could have encouraged the start of fractional pricing for gasoline. Why the continuation of the 9/10s-of-1-cent pricing? The pricing is built into the gasoline pumps, and it would cost the industry, and individual retailers, too much to change them.
One more theory is the extra "tenths" is a very old tradition that's never gone away. In 1935, a Reno Nevada newspaper wrote about "selling third grade gasoline at eight and nine-tenths cents a gallon."
In those times, a penny had considerable value. To raise the price of gasoline from 8 to 9 cents would be more than a 12 percent hike. To compete, gas stations raised prices by tenths of a penny. Around this time, federal and state excise taxes were also introduced in increments of tenths of a cent, so it made sense to keep the decimal value.