Isn't the "Merchant offers a separate domain" option against Google's rule that a merchant can't have more than one listing for any keyword? The separate domain would still be owned by the merchant and have the same content as the original domain, so regardless of whether only affiliates are using the separate domain it's effectively the same as if the merchant itself is skirting Google's rules. I'm sure you could ask Google to clarify that issue for you, but my guess is that it would not be allowed.
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