As I said, there are far to many merchants for an isolated prison island. Perhaps there should be a few people, that sell stuff. But only a few stuff and really specific stuff. Somethings you perhaps only get sold if you do them a favor or you get it as a quest reward at the end. But before all, the merchants should not get new stuff at every level up and at every full hour gametime. This just breaks the whole immersion. Merchants can get back to normal, after you escaped and you are back in the freeworld, but on this island it is just odd.
Of course fights would need quite a nerf in a more dire situation with less good equipment at your disposal.
I have asked for some changes to Fort Joy for the sake of immersion, another floor and better facilities and quarters for magisters.
But while you might be right that having so many merchants around makes things less immersive, removing them could be a hell of a lot more trouble than it's worth. It would require a massive rebalance of the entire act.
First, all enemies around Fort Joy would have to be reduced to level 1 or 2 at most. Forget those level 4 skeletons, that will be too high a level to reliably handle. They'd have to drop to level 3 or 2.
Second, they'd have to change the drop rate so there's more weapons and gear to find. Gold doesn't matter if you have nothing to buy.
Third, they'd have to either give you more starting skills or else provide a bunch more free skill books, because without skill book merchants, you'll be using only the same three until the Seeker camp. Hope you picked them well and.or got the teleport gloves, because one mistake and you'll never reach the seeker camp at all.
Immersion can enhance the experience of the player, but only if it doesn't come at the price of boring or annoying them. There's no point in making the prison super-immersive if players get so bored or annoyed that they stop playing.