The problem that I foresee with the "magical citadel" universe is in the way advancement occurs under the rules. You get XP by killing things. In fact, without DM arbitration, that is the only way you get experience - going out and killing something that's as powerful as you are. This has been alluded to, but I think the consequences are so far reaching as to throw the citadel society into chaos every generation.

First of all, magical items cost XP. The wizard lords making magical traps will have to pay 40 x caster level x spell level in XP per trap. Each permanent teleportation circle costs 4500 XP. Eventually, however, due to the magical arms race described in the formation of the cities, the wizards will have to hole themselves up in their castles, because the permanent defenses of anywhere they would go to get experience would kill them very quickly (all the other wizards are just waiting for one of them to head out - after all, they need that precious XP too.) If the wizard tries to fight things where he lives, the permanent defenses are so great that nothing he is capable of summoning will constitute a threat, and so no XP is earned.

There is no XP to be had in the cities. But the wilds, now; that's a rich source. The wizards in their towers can't have constant scrying effects on every one of the dirt farmers out there to see which ones become powerful enough to warrant their attention, and even if they found a nice chunk of XP, the fact that they would be killed by the other wizards just waiting for them to step outside will deter them from teleporting out there to kill. So, people in the wilds advance. They have goblins, then gnolls, then owlbears, and so on until they're fighting each other. Only a few wilders per generation will get to 20th level, but they will do so. And they'll be able to craft as many items as they need, since they're constantly getting an influx of XP from their rivals. And finally, since we know that these marginalized people on the outskirts of society resent their wizard absentee overlords, they'll storm the keeps. Since they've got all the items they can craft (or even buy in the cities) and are as high a level as the wizard overlords, and typically have a party with diverse skills, they'll succeed in killing one of those wizards, almost certainly. And once they've taken his city as a base of operations, the others can fall quickly as well. Now these adventurers become the overlords, and the cycle begins again.

All in all, it's a pretty nice campaign setting, because of the inherent instability.