There are advantages to the P/F system, but there are also disadvantages. I'll comment on this to the extent of my knowledge.
At Arizona, our initial grading scale was WAY too harsh, so the faculty took our ideas and revamped it just a couple of weeks ago.
I happen to think our system is VERY cool, but I'll talk about that in a moment.
We considered going to a P/F system at Arizona, but decided against it in the end. One reason is because it doesn't eliminate competition, it merely covers it up (in most cases).
In order to specialize, the PASS system (for matching with ADA specialty programs) requires that you submit your class ranking to the programs you are interested in. Meaning, that even if your school is P/F, you are still being ranked. Sure, the faculty may not tell you your ranking, but you are still being ranked. They are STILL keeping track of your scores. Also keep in mind that many P/F systems are nothing more than High Pass, Pass, Fail, or Honors High Pass, High Pass, Pass, Fail. Those systems have just given different names to traditional letter grades!
MANY schools have a grading system that is simliar to ours at Arizona. We have no minus grades, meaning that a grade which might typically earn you a B- will earn you a B, as will a traditional percentage that earns you a B. So, one can earn an A, B+, B, C+, or C. Anything below a C is considered failing.
When it comes to specializing, you have to remember that as long as you are being ranked against your classmates (which you will be), and your classmates have the same grading system as you do (which they obviously will), then it really doesn't matter much what the actual grading system is. The only time it really matters is from a mental standpoint.
For example, if the faculty determine that a 97 and above is an A, and a 92-96 is a B, and a 80-92 is a C, then so be it.
A grade of 91 would earn you a C in this case, but that doesn't mean it's a bad grade. It just means it equates to a C on your schools system. It means the high scorer on every exam could earn a 91 and have a transcript full of Cs. That doesn't change the fact that he/she will still be ranked #1 in their class.
Does that make sense? Since the entire class is graded on the same system, the faculty can call your letter grades whatever they like, and can make cutoffs whereever they want.
Sure, your GPA when you graduate might look bad. In this case people who got straight 91s through their coursework would have a 2.0 (C) GPA. Specialty programs will still look at the class rank and see where students fell. Further, schools will send a copy of their grading policy to any program that requests it, so when an orthodontic program sees that a student with a 2.1 GPA was #1 in the class, they'll know that the system must have been different than at other schools.