Ever wonder why some milk at the store is 1.99 a gallon and organic milk is upwards of $8 a gallon? They look the same and may even taste the same. So if there is a difference, (and I am in the camp of those who beleive organic is worth the premium) it must in where you can’t see it.
The same exists with web site hosting. The big companies that offer web site hosting for $3 a month are not always up front with all the details. Shared hosting environments typically cram hundreds or even thousands of different web sites on the same IP address. Search engines can associate your neighbors with you, whether you like it or not.
Another disadvantage of crowded web hosting is site load times. Search engines are increasing paying attention to how quickly your site loads. Slower sites can be penalized.
Take a look a this great article on stayonsearch.com about how web hosting can effect your search rankings.