Hmmm. So you think maybe it's doing something like (roughly; I don't have the exact case in front of me)

(\p q -> f p (g p q)) this that

==> beta reduce

let

  p = this

  q = that

in f p (g p q)

==> inline q

let

  p = this

in f p (g p that)

?

I tried marking the "this" in question INLINE CONLIKE [0]. Shouldn't that tell GHC that duplicating it is fine? I really want to see it for RULES.