You're right about the steepness. That's something I hadn't considered. For that matter, 2^(-n) is probably still a bit steep.
The function price
= (.8 + .2*2^(-n)) yields the following vallues:
price(0) = 1
price(1) = .9
price(2) = .85
price(3) = .825
price(4) = .8125
Each successive completed task yields half the reduction of the completed task. The fourth task will yield only 1/8th the reduction that the first task gave.
Perhaps (5/4) would be a better base than 2, since each successive task would yield 80% of the reduction of the previous task, and would therefore not be so small by comparison.
A minor note: The trading formula was updated recently by Armagan to make sure that, regardless of how skilled your merchant is, you will never be able to sell an item for more than (or as much as) the merchant would charge for it. In that same vein, it's important that any suggested formula ensures that players cannot obtain free wealth and bankrupt shops by buying items from a merchant and selling them back for a profit.
Because of the way that the trading skill formula affects the trade penalty now [presumably, from the skill information, it is an exponential equation of the form: penalty = k *.9^(Trading skill], it may be easier to simply increase a player's effective trading skill when speaking with merchants for whom he or she has done favors.