[Noumenon72]

It's more difficult to build a third floor than a first floor, to build a subway for three instead of a street for one, to install three sewer pipes instead of one, to police three rowdies instead of one. NIMBY laws redistribute those costs to commuter neighborhoods, but the crowding raises prices via simple increasing marginal costs. That's my model (I'm not the OP).

[ben_w]

On the other hand, three cities cost three times as much as one city. Or have I missed something?

[Noumenon72]

Yes, because it's not more difficult to build a third city than a first city. It's equally difficult. So there are not diminishing returns like the ones I described in my post. Although it's hard to get over the hump of the first city's network effects and get started.