i've rarely seen the merchant with ammo. ammo boxes yes, but actual ammo no. it's likely that he sells ammo to the bad guys. this is why the bad guys don't attack him. this is also why you find the ammo on the bad guys or money - bad guys haven't had the chance to buy the ammo yet. however, the bad guys somehow don't want the box, which is why the merchant has all these empty boxes and the enemies have all the ammo. anyone can buy ammo at any merchant. buying weapons, however, requires licenses. leon as a leo obviously has one. standard peasants not so much. since the peasants and the merchants were there first, it's likely the merchant had to sell SOMETHING to buy lunch or lodging.
the merchant also likely has non-functioning floor model versions. dummy ammo for testing if a weapon cycles. putting a grenade on display is probably not a good idea. but a prop might be good for business - any real life gun show merchant can attest.