A City Merchant sells items that cost Status Points and coin, and are only available to citizens of the same city. Some items will also require a minimum Guild Level, which is searchable in Advanced Item Search.
City Merchants sell Guild Level rewards like patents of nobility, charms, status clothing, house items, and crafting stations. Most City Merchants can be found by asking a guide for "City Merchant".
A Vendor buys and sells items with players. Any given vendor will sell only a limited selection, dependent on his market specialization, and prices may vary widely.