Thanks a lot for your time keeping RetroFE alive Pieter! Hopefully this can get sorted out eventually. In the meantime, here's one I came up with so one can get around the issue. It's all based on using the per-game launcher feature (explained here:
http://retrofe.nl/SMF/index.php?topic=51.0). There are 3 ways to go about it, and I'm gonna list them from most cumbersome to least.
1. You set up a game launcher that uses the complete address of the folder.
arguments = "M:/Media/Games/System/PlayStation/Tekken/Tekken.chd" -L "cores/mednafen_psx_libretro.dll"
This will work for both the PlayStation collection, and the game. The cons is that you will end up having to create dozens of launchers (one for each game), which can get messy.
2. You set up a game launcher that uses the command the merged collection accepts as valid:
arguments = "%ITEM_DIRECTORY%\%ITEM_NAME%\%ITEM_NAME%.chd" -L "cores\mednafen_psx_libretro.dll"
This will work for only the merged collection. If you were to open the game from the collections it's from, it won't.
3. You set up a new collection made exclusively for use in merged collections. So you create "PlayStation for Merged" with a command that merged collection accepts as valid:
arguments = "%ITEM_DIRECTORY%\%ITEM_NAME%\%ITEM_NAME%.chd" -L "cores\mednafen_psx_libretro.dll"
This way you have a separate command for your normal PlayStation collection and the merged one (so the game will work on both), without having to create per-game launchers.
Do note that this launcher exception has to be created on the collection the merged one is retrieveing the games from (so on "PlayStation", not on "Fighting Games").