Simply put, I would argue that the concept of "mercy" itself cannot exist if the concept of "punishment" was not there, with it, to begin with. If the concept of punishment was not there, then how could you say (or know) that someone's act was "an act of mercy"?
An act of mercy would never even existed since there was never any kind of punishment whatsoever to begin with (or to end with, in the case of Hell), a condition where everyone was always happy, pleased, satisfied, content, joyful, blissful, never having to worry about a thing (even just a little) and without any time limit a.k.a. forever after.. Heck, if that condition were possible (which is not), you wouldn't even need an afterlife (Heavenaka Heaven) if you get the idea (I'm not trying to say that I don't need it btw).
It is like asking why did God created darkness if He was so full of light? CMIIW