The Chicago three-party argument (C3PA) assumes (a) that B and S negotiate efficiently in the bilateral sense, meaning that they agree on exclusivity if and only if doing so increases their joint surplus; (b) that they cannot negotiate a binding product-market price or trading quantity at this stage (so that under exclusivity the product-market price will be the monopoly price); and (c) that E cannot pay B up front to refuse S's exclusivity offer.
3) If, on the other hand, E is more efficient than S then E will (if allowed) displace S and price at S's cost, (4) giving B and S the same levels of surplus as they would get if S supplied B at cost.
As noted above, in the C3PA's undifferentiated Bertrand model of product-market competition, entry by E hurts S, benefits B by more, and confers a net benefit on S and B jointly, so B and S jointly don't want to discourage entry by E.
In Cournot competition, for instance, if B's demand is linear (p = 1 - Q), and if S's unit cost is c and E's is e, then calculation shows that B and S jointly lose from E's entry if and only if 1 - 2c - 3[c.
The timing of the reporting of S's intercompany item is determined each year by computing the difference between the amount of B's corresponding item that is taken into account and the amount B would have taken into account (the recomputed corresponding item) if B and S were divisions of a single corporation.
34) Thus, to the extent the group's gain does not exceed the aggregate depreciation claimed by both B and S, recapture under section 1245 is required.
Under the matching rule, as B claims recovery deductions through the partnership in excess of the amount it would have claimed if B and S were divisions of a single corporation, S will take into account a portion of its intercompany gain.
If B's ownership of the lots at the time of sale would control in considering B and S as divisions of a single corporation, the entire $100 gain (including S's deferred gain) would be ordinary income.
The aggregation rule in the proposed regulations is more akin to single-entity treatment, since the holding period would not start anew if B and S were divisions of the same corporation.