Maladaptive Daydreaming: where wild minds come to rest
I might be missing your point as well, but I think merging the worlds can be very constructive if done correctly. Actually, my psychologist encouraged me to merge them but that wouldn't be very fun because they conflict so much like you said, that there'd be so much compromise that the "Wizarding World" would be devalued by the "Muggle World" so in its purest state the "Wizarding World" is greater. Granted, it would probably be healthier for me if I listened to her but um, no. I don't think I'll ever even be at a point that I'd want to get rid of my MD, let alone be able to let it go.
But, that being said, I do sort of merge them, but I leave the "Muggle World" out of the "Wizarding World". That, I keep intact, but I bring elements of the "Wizarding World" to the "Muggle World" and in moderation this seems to be quite healthy. Mostly, my "wizard" self, bringing characteristics of her into my "muggle" self has allowed me to achieve a lot of things my muggle self wouldn't be able to normally.
Well, getting my point isn't the point. Having your own is.
I keep them entirely separate in that I don't tell real life people about my day dreams. And my daydreams are pretty much all original content and separate worlds. And even as a child I never experienced the first stage you speak of.
The first stage, where you make up short, random daydreams...