The three-way merge looks for sections which are the same in only two of the three files. In this case, there are two versions of the section, and the version which is in the common ancestor "C" is discarded, while the version that differs is preserved in the output. If "A" and "B" agree, that is what appears in the output. A section that is the same in "A" and "C" outputs the changed version in "B", and likewise a section that is the same in "B" and "C" outputs the version in "A".