If your lower level pages link to Home, they are a part of your site's PR circulation. That alone is a benefit.
Your Level 3 pages should eventually be able to rank on very specific "longtail" terms, and that traffic will convert at a much higher rate (percentage) than generic keyword traffic - because the searcher knows exactly what they want and they see that you've got it.
It's not just for Google - it really pays to be meticulous about your product level pages. That's where the rubber really meets the road.
Thank you so much for your help. My big concern is the home and Level 2 pages because all of our business to date is because of the ranking of those pages, not the Level 3 pages (although as you say, keywords that rank those pages will convert better... I plan to work harder on those pages for the future:)
I still am not clear if Level 3 information can help higher level pages or possible hurt them. For example: Is the Home Page ranking based on Level 3 ranking, content, etc. or does it rank base only on its own merit? If there is a connection, how great is the Level 3 influence on higher level pages?
All these questions stem from considering changing my Level 3 static pages to dynamic pages.
I believe that properly-designed lower level pages can "reinforce" and assist the rankings of a site's main pages. For instance, one method of reinforcement is to put the same keywords on the lower level pages as on the main pages that they link to. Also, you can vary the anchor text in these links to improve the rankings of the main pages for secondary keywords.
While Google does use some sitewide factors in the algo, how they work exactly is part of their "special sauce" and they don't really talk about it. Having more SERP impressions for the total of pages on your domain is a help - so energy spent on lower level pages can help.
As with anything, you can mess around too much with a site and cause problems. But if you are asking "can it hurt the home page to have more Level 3 pages start to rank?" I'd say the answer is no.
Actually, I was concerned about the Level 3 pages ranking less or not at all and hurting the Home Page and Level 2 pages.
I mentioned above that overall SERP impressions from a domain can be a helpful sitewide factor. Even more helpful if those impressions draw clicks at an expected rate - or better than expected rate.
So if your Level 3 pages are getting fewer SERP impressions than they used to, that might have a small downward influence on other pages, including Home.
Note that I did say the downward influence is "small". Google still ranks pages most of all, and not "sites". A strong Home Page is still a strong page, no matter what else the site holds. Weak pages deep within a domain are no big deal - unless they used to be strong and some change you made has weakened them.
One factor I would take careful stock of is preserving vertical integrity in a site - in other words, don't do a lot of cross linking between Level 2 and Level 3 pages - especially Level 3. Some cross-linking is natural, but too much can turn the site into a mish-mash that makes ranking more difficult.
Does that help?
You are always helpful Tedster. I always look forward to your knowledgeable, well thought out answers.
I believe that sitewide factors are quite important. Here are some possible examples:
-- The age of the domain
-- The overall size of the site, including the total amount of content
-- How well the content on different pages adheres to the site's general theme or subject
-- The "trustrank" of the site
-- The naturalness of the overall link profile, including a natural distribution of incoming links over the various pages
-- Occurrences of main keywords and keyphrases on multiple pages and in various contexts
-- Structure of the internal linking between pages, and the anchor text used in these links