For those of you who may be wondering what this does – I have figured it out.
When a new function is added to an action/filter hook, it is added at the end of the array. However, WordPress specifies that those functions are to be executed by priority.
When a function is added, merged_filters is used to keep track of whether functions for a hook have been sorted by priority or not. merged_filters is checked on do_action/apply_filters to determine whether the functions should be sorted (by priority) or not before the hook is executed