The merchant's page is highly optimized for the keywords you are targetting. This means that when google adwords reads the landing page to decide how much to charge you for each click, it will be reading a page that is DEDICATED to those keywords. I have found that unless you are basically copying the merchants page ( in which case you're only adding more clicks required for the user to purchase) your own landing page won't receive as good a 'quality' score... For the best 'quality', and cheapest CPC, link straight to merchant. This is what I'm thinking... does anyone have any advice to the contrary?
It depends. You might not want to be bidding on the direct main keywords for the product / service, but rather related ones. In my short experience, many market's keywords are already bid up too high to make money. But if you can target related/lateral keywords and build a landing pages for those, you can make it work.
Google choose to display only one link per URL. so if someone else also doing the same thing (linking directly to the merchant's page) then any one ad will be displayed, depending on the QS and bid price.