I read through the Free Private Cities white paper and found this answer to the question, which agrees with what you said:

"Allowing competing security service providers with their own rules and thus competing legal systems may appear theoretically attractive

for reasons of preventing monopolies. In practice, however, the effort and inconvenience involved (transaction costs) are probably too high. It would take years for rules to develop in the market on how to resolve collisions between the various providers and legal systems. In practice, the owners of the strongest security service could do what they want.

"Once the model of Free Private Cities has proven itself profitable, then competitors will inevitably appear on the scene. This is the best guarantee for the residents that the respective Operators will not abuse their position of power. Apart from that, the right of every contract citizen to self-defence and the corresponding support of third parties against attacks remain unaffected or expressly guaranteed by contract."