diff --git a/dvc/commands/git_hook.py b/dvc/commands/git_hook.py
index 24baa36ef..948a217b7 100644
--- a/dvc/commands/git_hook.py
+++ b/dvc/commands/git_hook.py
@@ -74,7 +74,7 @@ class CmdMergeDriver(CmdHookBase):
             our = Dvcfile(dvc, self.args.our, verify=False)
             their = Dvcfile(dvc, self.args.their, verify=False)
 
-            our.merge(ancestor, their)
+            our.merge(ancestor, their, allowed=["add", "remove", "change"])
 
             return 0
         finally:
diff --git a/dvc/dvcfile.py b/dvc/dvcfile.py
index 9d2098245..7cd136f3e 100644
--- a/dvc/dvcfile.py
+++ b/dvc/dvcfile.py
@@ -172,7 +172,7 @@ class FileMixin:
     def dump(self, stage, **kwargs):
         raise NotImplementedError
 
-    def merge(self, ancestor, other):
+    def merge(self, ancestor, other, allowed=None):
         raise NotImplementedError
 
 
@@ -204,12 +204,12 @@ class SingleStageFile(FileMixin):
     def remove_stage(self, stage):  # pylint: disable=unused-argument
         self.remove()
 
-    def merge(self, ancestor, other):
+    def merge(self, ancestor, other, allowed=None):
         assert isinstance(ancestor, SingleStageFile)
         assert isinstance(other, SingleStageFile)
 
         stage = self.stage
-        stage.merge(ancestor.stage, other.stage)
+        stage.merge(ancestor.stage, other.stage, allowed=allowed)
         self.dump(stage)
 
 
@@ -310,7 +310,7 @@ class PipelineFile(FileMixin):
         else:
             super().remove()
 
-    def merge(self, ancestor, other):
+    def merge(self, ancestor, other, allowed=None):
         raise NotImplementedError
 
 
@@ -411,7 +411,7 @@ class Lockfile(FileMixin):
         else:
             self.remove()
 
-    def merge(self, ancestor, other):
+    def merge(self, ancestor, other, allowed=None):
         raise NotImplementedError
 
 
diff --git a/dvc/output.py b/dvc/output.py
index 84cfe674e..e4277a386 100644
--- a/dvc/output.py
+++ b/dvc/output.py
@@ -1127,7 +1127,7 @@ class Output:
                 "unable to auto-merge outputs that are not directories"
             )
 
-    def merge(self, ancestor, other):
+    def merge(self, ancestor, other, allowed=None):
         from dvc_data.hashfile.tree import MergeError as TreeMergeError
         from dvc_data.hashfile.tree import du, merge
 
@@ -1144,7 +1144,11 @@ class Output:
 
         try:
             merged = merge(
-                self.odb, ancestor_info, self.hash_info, other.hash_info
+                self.odb,
+                ancestor_info,
+                self.hash_info,
+                other.hash_info,
+                allowed=allowed,
             )
         except TreeMergeError as exc:
             raise MergeError(str(exc)) from exc
diff --git a/dvc/stage/__init__.py b/dvc/stage/__init__.py
index c749f0340..dedf44274 100644
--- a/dvc/stage/__init__.py
+++ b/dvc/stage/__init__.py
@@ -708,7 +708,7 @@ class Stage(params.StageParams):
                 "unable to auto-merge DVC files with deleted outputs"
             )
 
-    def merge(self, ancestor, other):
+    def merge(self, ancestor, other, allowed=None):
         assert other
 
         if not other.outs:
@@ -728,7 +728,7 @@ class Stage(params.StageParams):
         self._check_can_merge(self, ancestor_out)
         self._check_can_merge(other, ancestor_out)
 
-        self.outs[0].merge(ancestor_out, other.outs[0])
+        self.outs[0].merge(ancestor_out, other.outs[0], allowed=allowed)
 
     def dump(self, **kwargs):
         self.dvcfile.dump(self, **kwargs)
@@ -770,5 +770,5 @@ class PipelineStage(Stage):
     def _changed_stage_entry(self):
         return f"'cmd' of {self} has changed."
 
-    def merge(self, ancestor, other):
+    def merge(self, ancestor, other, allowed=None):
         raise NotImplementedError
diff --git a/tests/func/test_merge_driver.py b/tests/func/test_merge_driver.py
index 113984f92..7b673328b 100644
--- a/tests/func/test_merge_driver.py
+++ b/tests/func/test_merge_driver.py
@@ -39,6 +39,22 @@ def _gen(tmp_dir, struct, name):
         (None, {"foo": "foo"}, {"bar": "bar"}, {"foo": "foo", "bar": "bar"}),
         (None, None, {"bar": "bar"}, {"bar": "bar"}),
         (None, {"foo": "foo"}, None, {"foo": "foo"}),
+        (
+            {"foo": "foo"},
+            {"foo": "bar"},
+            {"foo": "foo", "baz": "baz"},
+            {"foo": "bar", "baz": "baz"},
+        ),
+        ({"foo": "foo"}, {}, {"foo": "foo", "bar": "bar"}, {"bar": "bar"}),
+        (
+            {"common": "common", "subdir": {"foo": "foo", "bar": "bar"}},
+            {"common": "common", "subdir": {"foo": "foo", "bar": "baz"}},
+            {"common": "common", "subdir": {"bar": "bar", "bizz": "bizz"}},
+            {
+                "common": "common",
+                "subdir": {"bar": "baz", "bizz": "bizz"},
+            },
+        ),
     ],
 )
 def test_merge(tmp_dir, dvc, ancestor, our, their, merged):
@@ -74,18 +90,15 @@ def test_merge(tmp_dir, dvc, ancestor, our, their, merged):
             {"foo": "foo"},
             {"foo": "bar"},
             {"foo": "baz"},
-            (
-                "unable to auto-merge directories with "
-                "diff that contains 'change'ed files"
-            ),
+            ("unable to auto-merge the following paths:\nfoo"),
         ),
         (
             {"common": "common", "foo": "foo"},
             {"common": "common", "bar": "bar"},
             {"baz": "baz"},
             (
-                "unable to auto-merge directories with "
-                "diff that contains 'remove'ed files"
+                "unable to auto-merge the following paths:\n"
+                "both deleted: ('foo',)"
             ),
         ),
     ],