mracole - I really think there's a good rationale for considering the 256 AAC format a "sweet spot" for the purposes of iTunes Anywhere, which basically is what iTunes Match is. You can get plenty of music onto your iPhone at that file size. You're probably at the high end of when it comes to buffering/playing while downloading, based on posts I've read by people who have tried it on 3G. You can download quite a bit in a short time on wifi. So even if the hardware is capable in some configurations of playing back higher quality files, you move to anything that increases file size from the 10-20Mb range and you lose a lot of flexiblity, which is what I think most people who use things like iTunes really want and expect.
I agree with this completely.
For the moment I'm just waiting for iOS 5.1 to be released so I can see if Apple has fixed that annoying "ghost track" bug and fixed Smart Playlists. If they do then iTM will become useful to me and having AAC files of my ALAC files available for my iPhone in the cloud will finally be living up to the potential of iTM.