God save our gracious Queen
Long live our noble Queen
God save the Queen
Send her victorious
Happy and glorious
Long to reign over us
God save the Queen
hehe, ok enough of that.
The merchant state idea popped into my head when I was thinking about renaissance Italy. Although not exactly the same, my idea was kind of an exaggeration of the mercantile societies of renaissance Florence and Venice. I'm not entirely sure if Venice was the exact same, but in Florence, the powerful merchant families were always trying to outdo each other while at the same time trying to keep up their reputations with the public so they could get into office. If you want to see how powerful these merchant families could be, look up "Medici". The Medicis were bankers (money lenders/loan sharks) who gained so much wealth and power they basically became nobility, some even wormed their way into being Pope.
That said, if we want a more Feudalistic or Monarchic society though, what about a hybrid idea? Basically, you have a ruling house (king, queen, prince, duke, earl, count, whatever) who has official political control, but below him/her is a middle class of wealthy businessmen (traders, merchants, bankers, etc.) who have real financial power over the people, enough to fund private armies and be a huge thorn in the side of any regent. For this reason, although technically still a Monarchy, the ruler wouldn’t have unquestioned authority and so would have to act with some caution. Upsetting the people could spark a revolt that results in one member of the mercantile aristocracy taking the crown. The king would have to be neutral for survival. Siding with the “good” empire would upset “evil” empire supporters and vice-versa, so what you end up with is a neutral 3rd empire where everyone is welcome as long as they don’t cause trouble.
This third empire may even be an official meeting ground for the two rival kingdoms to come and discuss matters such as potential treaties, or to broker deals with the neutral nation itself.
I’m just thinking that it would be hard for a neutral nation to stay neutral when 1 person is in charge. Both kingdoms would try to sway the ruler’s favour, and likely one would win; however, if the king had to answer directly to the people below him, if not officially than for practical reasons, what you have is really a Monarchy in name and structure, but a sort of Republic in practise.