I decided to kill those two people watching the beastmasters pits before they could run away after killing the beastmaster. I think this may have made some people hostile towards me. Has this had an effect on my reputation. My Paladin's abilities showed they were evil.

Anyway, now the bonus merchant there is hostile. How can I make him green again so that I can speak to him and trade? Is this because my rep. is low now (11 - never saw it go down).

You could try to charm and force-talk to him. If this doesn't work you could use the console to spawn another one.