The problem I ran into when I had to do this on a prior project wasn't the algorithm for worrying about individual characters. It was dealing with how to manage people highlighting entire paragraphs or documents, and pasting over them with new content, at the same time as the other editor(s) had been changing things.
Ultimately, while there were algorithmic answers to just about any scenario, we ended up just declaring a business answer instead - the editor only would let you into edit mode one paragraph at a time, and you locked that paragraph while you were in it. We found that almost nobody was actually editing the exact same paragraph at the same time anyway... they were working in different parts of the documents. So not only did that resolve all possible copy/paste insanity, the algorithm became brain-dead simple -- when you update or leave the paragraph, send those changes to everyone else's editor.
Ultimately, while there were algorithmic answers to just about any scenario, we ended up just declaring a business answer instead - the editor only would let you into edit mode one paragraph at a time, and you locked that paragraph while you were in it. We found that almost nobody was actually editing the exact same paragraph at the same time anyway... they were working in different parts of the documents. So not only did that resolve all possible copy/paste insanity, the algorithm became brain-dead simple -- when you update or leave the paragraph, send those changes to everyone else's editor.