The Merge setting is to prevent duplicate entries. When checked, it finds any existing part numbers in the catalog that are also in the current upload. If there are matcches, it overwrites the part number data with new information in the upload.
If unchecked, it treats as completely different entry and does not try to find if there is an existing copy of the part number alread in the catalog. This setting would normally be needed if the same part needs to be cataloged under multiple categories/subcategories in a single catalog.