It reduces the chance people will SeeTheOthersHumanity. It polarises people on the sidelines into one faction or another, and can reduce the conflict to a single high profile issue.
The pidgeon-holing problems are similar to those caused by (bad) polling and voting. VotingIsEvil.
Political parties tend to polarize opinions too. You end up with representatives voting for the party line rather than for their own opinions or those of their constituents.
Without official parties, you would have no voice in a representative democracy, as a Wiki:CryptoCracy of aligned representatives would be in power but you would have no structure as a citizen to control it. The purpose of a party is to be a more efficient means of organizing in the legislature but within the realm of public control (e.g. tax breaks, special media access rights, etc.). However, it is still possible to avoid having parties and maintain this crypocracy. It's just incredibly expensive, and therefore stupid. I think that's a good thing because otherwise you would end up with situations like Argentina where the private media can construct a government that favours them. -- SunirShah