According to Reference Dictionary, mercerized wool has been treated with a caustic alkali under tension. Once the process is complete, the wool has increased strength and luster, and it accepts color dyes more readily.
John Mercer was a British chemist and textile maker who discovered that adding lye or sulfuric acid to fibers causes those fibers to swell and straighten. This strengthens the fibers and allows color dyes to permeate more easily. He patented the process in 1851.
In 1890, another chemist named Horace Lowe took Mercer's patented process a step further by adding tension to the lye/sulfuric acid-treated fiber. The extra step resulted in greater fiber luster.
The combination of Mercer's and Lowe's experimentation led to what is known as the mercerization process. It is used on many fibers, including cotton and wool.