You can soften the edges of an image by using the smudge tool. Select it from sub-menu also containing blur and sharpen, and move around the edges of the image.
Create a new layer in base of your image, select the region you want to soften and apply a Gaussian Blur, finnaly put the transparency of the layer to 50% or a desire porcentage.
As any process in Photoshop, there are many ways to achieving this. The simplest probably is choosing the blurring brush (gaussian blur) and colouring the edges of the respective image.