How does a PC like that normally talk to a fellow subscriber with an IP on the same subnet?

The modem is working as a bridge, not a router. So it works just like you were all on a slow LAN.

Actually, on mine, it looks like you're right; it does do proxy arp. I'm not sure how this is implemented on my ISP's router, but an arp request for anyone else on my subnet gets the router's MAC address, and a traceroute to those IP addresses shows it going through the router. Odd.