The overcrowding debuff was a less than ideal response to the undesired tactic of stacking tons of units onto the same space in order to create an unrealistic super unit. While I admit this isn't clear in the help, the effect is not simply on or off but is based on how much overlap there is between units. So, if two units are only slightly touching each other, the debuff should be quite minimal. Whereas if you've got ten units piled directly on top of each other, each unit will be doing approximately 1/10th the damage they would have normally.
The AI in Hegemony does not receive the overcrowded debuff because, while it is programmed to avoid overlapping units, in practice this is very hard for the AI to do within reasonable processing limits and we found it put them at too much of a disadvantage against the player.
The intention for Rome is to eliminate the overcrowding debuff entirely. One of the many engine improvements we've made to Rome is to add proper collision detection and avoidance to all of the units on the map. Not only does this significantly increase the accuracy and importance of battlefield formations and tactics, but it makes it virtually impossible to stack units on top of each other.