Given this tree:
   A/
      foo
   B/
      A/
         bar

If I drag A over top B, I get a dialog that says, in bold, "A folder named "A" already exists.  Do you want to replace it?"  This rather unambiguously (I think) suggests B/A will be removed, and A/ (the one containing 'foo') will take its place.

However the dialog prompt goes on to say: "The folder already exists in "B".  Replacing it will overwrite any files in the folder that conflict with the files being copied."

I feel the subtext contradicts the heading (bolded) text.  The subtext says rather that the directories A/ and B/A will be merged, with the files in A taking precedence.  This indeed is the behavior.

I recommend then that the bolded heading say: "A folder named "A" already exists in "B".  Do you wish to merge the contents of these two directories?"