By default all duplicates are moved to the "Deleted items " folder. This the safest way and usually shouldn't be changed.
For contacts you have to more options:
|•||Duplicate contacts can be merged.|
|•||Both values can be kept while merging.|
You have 2 contacts that only differ in respect the the phone number. The older number is 5678 and the new one 1234. If you choose to keep both values, the new contact will have the phone number 1234 (old: 5678). If you don't want this, you can turn this feature off. Then the merged contact will just have the phone number 1234 .