You are correct.  There is an optimal "level of service" (car density).  Too few cars on the road, and you have some people speeding, changing lanes, etc., which actually slows down traffic overall.  Too many, and it's the bumper to bumper mess we have now.  The optimal number allows traffic to flow well, but does not allow people to change lanes easily, nor to drive too fast.  As a result, everyone stays in their lane, everyone keeps up, and everyone keeps moving.

In some cities, they actually close off the on-ramps in order to maintain this optimal level of service (during rush hour, say).  After a certain point, more cars on the highway actually means less people getting out, so they don't allow anyone else on.