Sanchez, 28, has entered the final 12 months of his contract at the Emirates Stadium, and has been widely tipped to leave his London club this summer, with City firmly in the race.
On Saturday, the Colombian international admitted that he wants to play Champions League football next season, which has thrown his Arsenal future into further doubt.
Merson has said that his former club should sell Sanchez if he does not want to stay, but the Englishman has called for the Gunners to demand Man City forward Aguero as a part of the deal.
"I don't think Arsenal can replace Sanchez, can they?" Merson told Goal.com. "He gets 30 of their goals, but you've got to move on. If someone doesn't want to be at the club, Arsenal are a big club and you don't want players who don't want to be there. Arsenal are a big club, a very big club and you don't want that.
"He's a good player - if I were Arsenal I'd be ringing up Man City and saying 'Give us Aguero and you can have Sanchez.' [If Alexis wants to go to Man City] then I'd say I want Aguero. He's better than Sanchez."
Sanchez scored 24 Premier League goals in 38 appearances last season, while Aguero registered 20 league goals in 31 appearances in England's top flight.