OK, I seem to have found a workaround that posts the blank jpg and eliminates the error message. I went into the merge source file and added the Blank.jpg file path as a merge field. It seems a little clumsy since every file will have it, but entering the path into the conditional field produced the "Filename not specified" error. Here's the syntax that finally worked:

{INCLUDEPICTURE {IF {MERGEFIELD PhotoPath1} <> "" {MERGEFIELD PhotoPath1} {MERGEFIELD PhotoBlank}}}

For whatever reason, if I don't use the PhotoBlank merge field and instead enter "Q:\\........\\Blank.jpg", I get the error message. When I hit Alt-F9 to show the fields, WORD has removed the quotation marks around the file path and thus the error. If you have a more elegant solution, I am more than willing to entertain it but I can work with this, I think. Your patience and willingness to help is greatly appreciated.