This is what Flickr's FAQs have to say about collections:
How is a collection different than a set?
A set contains photos. A collection can contain sets (or other collections).
Isn't this just sets of sets?
Yes, but no. It's better.
Can anyone clarify for me why it's better? I'm sure everyone uses them differently; I'm just having a hard time figuring out why you'd need them, and the FAQ is not exactly helpful.