I discovered that the majority of my images in my Photos library now have reduced resolution.
How are you testing the resolution of your photos? In Photos the resolution is displayed in the Info. If you check the resolution by exporting the photos, use "File > export > Export unmodified original", or you may be seeing a lower resolution. Dragging and dropping from Photos will just give random results. Have you checked the resolution by looking at the width and height in the Info in Photos?
You are asking about merging libraries. Photos does not have a tool for merging libraries. You can open the backup library in Photos export the unmodified originals and import them into your current library. Or sync each library with iCloud Photos in turn and the two libraries will be merged in iCloud. During the merge identical image files will bereaved as duplicates, but low resolution photos will not replace high resolution versions.