Merchants have the choice whether or not to hold bitcoin. It's probably fair to say many or most merchants will choose to receive dollars because their costs are in dollars, and the price of bitcoin is still volatile. But the price is volatile only because bitcoin is still nascent and not widely held. As it becomes more widely held and more liquid, the volatility will go down, and the willingness to accept and hold bitcoin will increase (i.e., there will be an increase in reservation demand). Merchants who are willing to accept and hold bitcoins will also benefit from lower transaction costs - those who have the conversion done for them are implicitly paying the transaction cost related to the volatility and bid/ask spread in the market (or perhaps more likely it is the consumer paying this implicit transaction fee).
It's also important to realize we're in the very very early days of bitcoin. This is really like 1994 for the Internet.