The problem with Merc is not DPS related, its mobility/utility. You can make changes to both of those with little to no affect on PVE performance.
Option 3 is what is happening
I've always said that mercs have the deeps. They can do very good damage...IF you leave them alone. However, it's their survivability/utility/escapability that makes the AC completely blow in a pvp environment. Now some people are saying that mercs only do well against ****** teams. Well, here is the other problem. Even ****** teams / players are learning how to shut down a merc. I'll give you an example.
Tonight I did my pvp daily solo(*********** torture by the way) on my full WH Arsenal Merc. First match was a huttball, so of course I take the high ground and get ready to bombard the enemy team. No more than I would say a minute in after ive got a couple of tracers missiles i'm jumped by a sentinel and shadow who proceed to tear my poor merc to shreds. Yes, i'm the first to die. I respawn track down the enemy ball carrier and start my dps rotation once again i'm jumped on by melee almost immediatly. I die. Respawn. Rinse and repeat. This is how the rest of my night went This is how most of the WZs that i'm in go. It's like the Arsenal AC is a *********** magnet for unwanted attention.