Re: how do you explain the smooth scrolling transition of the road side bands?
It's not palette cycling like an ST .NEO picture, where the colour definitions are moved around a small palette. The colour bands aren't on the original image.
The original image is just lines tapering to the horizon. As each row is copied from the stock image to the background layer, it can be rendered in one of two palettes (or four in the case of Hang-On, where the road markings repeat more often than the road bands). It can switch from one colour scheme to the other on any line of the screen.
The ST/Amiga could mimic this by actually redefining parts of its colour palette on different lines of the screen, using raster-based interrupt routines (the conversions of Space Harrier do this). The arcade machine didn't have too - its screen display had a much larger palette than the stock background image, and the graphics were translated from one palette to the other when drawn.
The sprite scaling technology had a similar trick - each sprite had its own smaller palette which would be translated into screen colours when it was drawn, much like early texture mapping on a PC, to keep the bit depth of the textures down. Note in Space Harrier how you get the same mushrooms and robots in different colours. Scrolling beat-em-ups would sometimes use the same trick to vary the bad guys.
Take a look at this:
Which includes the basic road images from the arcade boards.