You'd think that the central focus of the Old City would be the religious and historical aspects of it... and in general, it is! BUT.... The markets and shops and taxis are ALL geared towards the tourist. They will HIGH BALL you with prices. Bargaining is expected. Every shop sells the same tourist merchandise. And they will PRESSURE and PRESSURE you into buying something and at the prices they want... which, according to a tour guide I talked to, is AT LEAST 2x what the item is really worth.
So you have a choice... stay firm, or decide up front you're going to help with the city's poverty, and pay more than you need to for anything you buy (including taxi service).
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At Least Do This: At least act like you are trying to bargain. If you're the meek type... stick with the hotel shops (and even there, you can bargain - they're usually just not as overpriced)... or wait until you get to the airport to buy something.
Alternative: Shopping in the old-world like markets is part of the fun... Don't wuss out! Go and do it! And don't get so wrapped up in the actual price... enjoy the experience of trying to haggle with someone you've just met who's calling you his best friend for life. :)