If anything it would make maps more realistic. Cities often are divided into zones/districts for administration/governing. For example the city of Glasgow has many council districts inside it, many with Glasgow somewhere in their name.
That is a feature of subdividing cities, not automatically merging them, which is what I replied to.
In the case of two cities which should remain separate growing into each other (eg for a scenario) then a flag could be used to prevent city merger. It is then up to the map maker to assure that the city placements are meaningful and will not overlap names badly.
Then the problem we are discussing here remains, because the meaningful positions of real life cities will cause overlap. Just check out Newark, Jersey City and New York City. In Google Maps, New York City (without "City", but I don't think it's the state, because no other state names can be seen) makes Newark invisible until you zoom far enough in. At that point, the names of some of the districts of New York City have already become visible. And you have to zoom in even more for the name Jersey City to become visible.
Label conflicts is a problem as old as the concept of maps. It is resolved on the maps, not by rearranging the world the map represents. All people reading maps must just cope with it. (Fortunately, the "inhabitants" in Simutrans won't be confused by offset labels, as is happening in the real world when hastily digitized maps were put into GPSes.)