File merging is a feature of LZX which enables compression to be increased,
often very significantly, by allowing data from one file to be compressed
using the knowledge of previous files in the archive.  This feature, unique to
LZX on the Amiga, often improves compression by 300% or more!   Example 

This feature is very useful when compressing text files and source files,
where there is often a large amount of text common to many files.   Example 

There is also a significant advantage to this feature when compressing
a large number of small files, since the data overhead of re-starting
compression for each file is now removed.  This is particularly true when
compressing ".info" files.   Example 

Even decompression time is improved, since there is now much less compressed
data to procress.

There are only minor disadvantages to file merging, which appear when deleting
files from a merged group, or extracting only some (but not all) files from a
merged group.

To see the advantages of file merging first-hand, try recompressing the LZX
distribution archive with LZX; LZX will compress the three executables (for
the 68000/68010, 68020/68030, and 68040/68060) down to a tiny size because
they are fairly similar.