Hi Rob,
First the easy answer... why you add water: Wine kits require water because the juice is concentrated. If you make wine from grapes, the crushed grapes are all you need. But to make a kit, they concentrate the juice for a variety of reasons. You are actually getting the same amount of "juice" in all kits, but they have had water (and some solids) taken out of them before it was packaged and sent to you.
Why cheaper kits have less "juice". The juice in a cheaper kit has been further condensed. This makes it take less space and cheaper to ship, but it also cuts out more of the total solids in the must. These solids create body and flavor that can be lost during the concentrating process. This is particularly important in reds and their development. That's why there is less of a difference between cheaper and pricey white wine kits, but there is a big difference between red kits.
I wish I had a link with this info for you... maybe someone else does. I read this in a book, so I don't have it in front of me right now.