Merchants hate jacking up prices unless that jack-up puts money in their pockets. Jacking up prices drives away customers.

Not if everyone has the same credit card fees.

But they don't, large vendors often negotiate their own contracts

They do this to increase their margins because otherwise... they eat the cost of interchange.

Even overall demand can go down if prices rise

It's inconsistent. Some do, some do not. Tipping by card comes straight out of the recipient's hands, regardless.