Right now the only thing stopping most merchants from accepting bitcoin as a form of payment is the volatility.
That's not stopping them at all, since they can set prices in fiat and sell their bitcoins as soon as they receive them. Payment processors such as BitPay can do this automatically for a small fee. Volatility is a total non-issue for merchants.My question is, what if the price of a bitcoin were to rise to 100000$...200000$, maybe a million? Would this mitigate the volatility for merchants?
Yes, since the only way for bitcoin to reach such a price is a massive increase in demand, which means more capitalization and liquidity, with the result that it takes more money to produce price swings of the same magnitude.Say if you want to sell an item for 50$, and the price subsequently drops 5% for 1 bitcoin, wouldn't this result in less of a loss for the merchant than if the price were 140$ or something? Or would the outcome be the same?
It would be exactly the same. A 5% drop is a 5% drop no matter what the price is in absolute terms.Or would volatility just scale along the price, eg. if the price gets higher the volatility spikes also get bigger?
The reverse would be the case, for the reasons previously mentioned. Higher price = less volatility. 
