DocType Namespace Collision

What will happen if a custom DocType has been created and a subsequent frappe/erpnext update introduces a doctype of the same name? Is this case handled?

Yes, your custom doctype will be overwritten by the Frappe one when you migrate and only exist in the database backup before that. “Custom” here meaning that it has the ‘is custom’ checkbox checked, not a doctype that you have saved to your application.