So other than creating more traffic than necessary (which could affect the pool servers and yourself) does being able to hash at a higher difficulty not pay off any better than at 1?
Nope, unless your using the POT payout method on Ozcoin which is bit like gambling.
When I see shares accepted in cgminer and it says something other than 1/1 (for example 2/1 or 16/1) I assume I get credited for one share, correct?
Correct
Is seeing things higher than 1/1 any kind of indication that a higher difficulty would be beneficial?
Not really, if you see one over 31.3M it will be a block solver.
And also, what happens when too high a difficulty is chosen?
Just higher variance. It should still even out over time.
Do you see your payout rates go down as you maybe aren't able to solve shares as quickly?
Your payout could vary up or down. But, again, it should even out over time.
So if I have a good idea of what my combined erupters will do at diff 1 then I just need to make sure I don't see a decline in accepted shares over the same amount of time at a higher difficulty?
No, if you set your difficulty to 2 you will submit half the number of shares but they will be converted to diff1 shares by the pool and you will be paid on that estimate. If you set your difficulty to 4 you will submit 1/4th the number of shares and so on.
Whew, that must be a record number of questions in such a short space.
Hope it helps,
Sam