The merger doesn't sound tempting.
Never been a fan of either car company, and no matter how many times smaller cars were introduced here in the USA, we , as a population opted for the big cars. When gas hit near $4.oo a gal the mindset changed, but only slightly.
I opt for a car with some mass. and don't like the thought of being in a crackup with a small car. Remember the science experiment with the large sphere bouncing against the small one? The small one goes flying. I will opt for driving the large sphere.
My 190E was actually too small, but a heavy car for it's size. The E320 is about right.
I think the large car/small car argument is somewhat driven by age. most of the younger folks [sub 30] have no problem with Scion Xb or Civic or Malibu or RAV4 or that sized vehicle. As folks get older and get families they tend to get to the family truckster and then never move back down.
My E500 is in the shop for its scheduled maintenance so they gave me a C350. It is every bit the car. I flipped to the trip computer and it had not been reset in 8000 miles. It had averaged 30mph for 8K miles and averaged 22.4mpg, in a C350. That is not bad for stop and go.
As manufacturers move the midsized cars to become their top sized cars, folks will adapt. Your two spheres argument works but it also works in the future as everything moves downward in size 10%, or 15%. Some will get the E Class sized car and some will get the C or small sized Benzo.