How can I counter Merchant Elves?
In Small World, as soon as you discover that someone has a combo that seems powerful you need only to do a couple things


Kill off any declined empire of his
Regularly snipe a territory or two of his every turn.


If at least one other players agrees with you, the declined empire should be gone by the start of his second turn with the powerful combo (at the latest).  Without a declined empire regularly gaining a few VPs/turn, it is very hard to win.

Next you have to deal with the elves.  You definitely don't want him expanding to 8 territories and taking 16VPs/turn!  8 elves can be knocked back pretty easily.  He has no combat bonuses on either offense or defense, so you should be able to reduce him to a max of 2 territories at the start of his turn pretty fast.  Bottle him up with stacks 2-3 high, this will limit his expansion and should keep his VP generation below yours.

Don't be afraid to go into decline early and often.  Grab any combo with a combat advantage of some sort and exploit it.  Once it plays out, get another one.  The Merchant Elves will be stuck fighting for the same 2-4 territories every turn until he goes into decline.

Merchant only gives +2 troops, everything else except Fortified (+3) gives at least +4 troops.  This means that Merchant is meant to be a very powerful ability, on the other hand, you will almost certainly outnumber him.  Grab a combat oriented power on top of that and the battles should greatly favor you.

Some combos that might be particularly annoying to the merchant elves are:


Flying Ratmen or Amazons (attack his soft underbelly with a ton of troops)
Mounted Skeletons should have him restricted to the mountains in no time
Stout anything - just throw them at him and go get another empire while he cleans up the carnage
Commando Giants - grab mountains, anything around them will probably fall to 1 attacking giant!