I think there is something to be said for just letting the kids play and staying out of it.
The following season, as a 12 year-old, we got a few new players in a group of new players who moved up from the younger division. We went 15-0 and won our league championship. Four of the new players went on to become All-State high school soccer players, and one of them later played on the first U.S. World Cup soccer team in 1990.
As I looked back on that situation years later as a baseball coach, what I remember most is that I was playing on two teams in an organized league whose players had no business being on the same field together. The only thing we had in common was: (1) our parents wanted us to play youth soccer, and (2) we were in the same 11-12 age group.
I never had that problem as a kid playing baseball because I didn't play in Little League. We played baseball in the schoolyard every day, all summer long, with a group of kids whose similar skills made them "natural" teammates and opponents. We never needed a "mercy rule" because we never would have played in a group where one team could dominate another so badly.