These settings configure the Conflict Solver (Conflict Solver).
You can either choose to use the Built-in Conflict Solver or an External Conflict Solver. An external conflict solver is defined by the Operating System Command to be executed, and its Arguments.
Arguments are passed to the Command as it would occur from OS command line. Additionally the place holder ${leftFile} and ${rightFile} and ${mergedFile} can be used, which are substituted by the absolute file path of the left/right resp. merged (resulting) file.
With Compare with Base selected, the highlighting of the changes resp. conflicts takes the contents of the base file into account: Lines (in the left, center or right text area) which are not equal are also compared to the corresponding lines of the base file and the highlighting depends on the result of this comparison.
For details on the other options refer to Built-in.