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Shilin Night Market (士林夜市) around Wenlin Road (文林路) and Dadong Road (大東路). It is easily reachable on the MRT (subway). To really taste the flavor of Taiwanese life a trip to a night market is a must, and Shilin is one of the largest. The market began in the 19th century as a collection of vendors trading their goods near a small harbor along the Keelung River. Today the harbor is long gone but the night market has become what is quite possibly the largest collection of vendors and eateries in Taiwan. However, it is now a large indoor market. While shielded from the elements and the food aromas (and some say odors) are ventilated away, some feel that the night market flavors are not as authenic. Nevertheless, it is considered to be one of the "must-see" attractions in Taipei.
For a more "authenic" experience, the Raohe Street Night Market. It is a short cab ride or walk (a bit over one mile) from the Xinyi District (City Hall/Taipei 101). It is one long narrow street (nearly 1/2 mile) with stalls on both sides as well as in the middle. Merchandises range from clothing, houseware, toys, small electronics and of course food.
The Tunghua market and night market is a shor twalk (1/2 mile) southwest of Taipei 101. This is probably the most "authentic" of the three markets mentioned here. There are many more markets and night markets around the city but it is best to ask local people for their suggestions.
The night markets generally do not offer many bargains, although prices can be negotiated quite easily, espeically if you are getting multiple items.
Note that the day markets are closed on Mondays. The night markets generally are open from sunset to after midnight.