I heard about this a while back so my friend and I made this search engine: http://www.flyshortcut.com/. Only works in North America, and like most people say - be mindful of the risks!
Not sure - perhaps the airline is promoting that route or that route is already popular. Often the "C" segment takes you to the Caribbean or to Las Vegas. Price is not always correlated with distance flown.
They certainly frown, but only if they know you're doing it. Don't lie if they ask, but no need to offer it up. You can also book without using your frequent flyer info to be safe.
Ya, absolutely. Make sure you have carry-on only. I've done it before where I've convinced the agent to let my bag off at the mid-point but I'm pretty sure I got lucky...