The AI appears to be of two minds on what to do with merchants. One is to hunt down the human players merchants and buy them out and the other is the more typical business of setting up shop and trading.

If you keep spies or watchtowers in the vicinity of merchants you have you can see the opposing merchants in time to do one of the following:

1. check them out and see how strong they are, if your merchant is higher leave them in place and dare the AI to try and take them out, or take them out preemptively with your merchant
2. kill the advancing merchant w/ an assassin
3. take your merchant off the trade item temporarily as the opposing merchant nears (I often do this by just pulling them into the nearest town or castle) where they cannot be bought out, shortly thereafter the opposing merchant will lose interest because it appears they are programmed more to hunt for human merchants to buy out than to track down that specific trade item near you
oh, or
4. never give the AI the choice of hitting your merchants and send them way off the map somewhere that pays quite well and is such a hike no merchant AI wanders down there (if you look down at the bottom of the map below Portugal/Spain in N Africa) you will find 3 trade items at the very bottom of the map, all three trade for 100-300