I said merchants would stock items of the appropriate levels, so the prisoners would sell items level 1 through 3 or 4. And again, they would need to carry a decent quantity of items of various magical qualities for this to work. Gareth would sell items with levels 5 through 8 or so. It's a bit ridiculous that level 3 prisoners are selling level 9 items. I mean, they could at least keep restocking but limit the max level of merchants items appropriately.
I think 1 hour restocking is fine, even if they limited merchant item level. Too little time between restocking and you might find yourself trying to scrounge some coin around to buy a particular item and find its gone when you come back. There's like 5 good merchants level 5-8 even if they limited max level of prisoner merchants, you should usually find something appropriate between them. They should probably guarantee certain types of items from at least 1 merchant though, even if they're white items. So you can always find at least a white cloth helm of the appropriate level, for example.
I'm not that keen on the idea that you can just run around to merchants enough times to get some of the best gear in the game. Of course, your gold count is a limiter to this with a balanced economy, but it still feels a bit off to me sometimes. Epic items at merchants should be pretty rare, I think (which they have made so mostly this last patch).