I felt Morrowind's cities were larger because they had smaller buildings, were more cramped (hell, shops were just a dude standing in a corner or behind a desk with stairs by him. His room contained a bed, an end table, and a shelf), and had more options in terms of traders. Balmora itself had 3 conflicting traders (conflicting meaning that they traded generally similar items). It also had the two conflicting alchemy traders (temple and the witch lady). 2 armorers (if not 3), and other such things.
I cannot agree with this more. While the Imperial City did have a little overlap (for example, you could get a sword at either Slash and Smash or... that old lady's place (name?), or general stuff at Jensine's, Three Brothers', or the Copious Coinpurse, the other towns generally had little more than the RPG standard: an armaments shop, a general goods store, a couple inns (the low one, the high one), guildhalls, no more than one alchemist (usually Mages' Guild, with Skingrad being the exception), the castle, the cathedral.
Vvardenfell's settlements, on the other hand, were veritable bazaars. Shopping for a sword in Balmora? You've got the Fighters' Guild and the Razor Hole, not to mention other incidental sellers of weapons. Armor? Fighters' guild again, plus that wood elf's place... what's it called? There were three general merchants: that one khajit, the pawnbroker, and the outfitter way off in the corner. Alchemy had three providers: the mages' guild (pathetic I can't remember her name), that high elf's place in the good part of town, and the Temple. Clothing could be had at the general stores, a little from Mages' Guild enchanter, and then there's the one that specialized in it. Loads of options.
And the same was true of the other House seats: Al'drun's outside merchants competeed with the Under-Skar merchants competed with the Imperial Guild Merchants. Saldrith Mora was littered with shops and kiosks. Vivec... I don't think we even need to go there. Options galore, even within a single canton (with the Foreign Quarter having the greatest variety).
EDIT: Come to think of it, the lesser variety could also have been deliberate both at an in-fiction level as well as the metafiction level. Where Vvardenfell was the wild frontier, Cyrodil is the rotting heart of an empire that is known to have guilds and cartels for everything. The merchants of the Imperial City were also organized into a professional organization designed to limit competition. It is unfortunate that the one quest that dealt with that issue painted the outside competitor as a villain (or rather, the unwitting accomplice of one). But its entirely possible that the lack of mercantile competition is due to a combination of a decaying economy and a cartelized market.
Oblivion's cities felt small because its buildings were so damned huge. They were mansions, practically. A store might have 3 rooms downstairs and 2 upstairs just for 1 person. It was rather excessive in size for such a small amount of characters. And, as was mentioned previously, it had no geographical difference. It was all flat. In Balmora, one had to go downhill, then back uphill to get to the other side.
Well, I think the larger buildings were deliberate, showing how incredibly wealthy some of the cities' denizens were relative both to the poor folk of Oblivion, and the people of Vvarndenfell. And I don't accusing the towns of "flatness" is precisely true. Anvil was pretty flat, but the others had elevation differences, subtle in some cases, dramatic in others. Chorrel has a mild rise in elevation as you approached certain sides of the town, with the poor part in the lowest spot (typical, really). Skingrad had bridges going over those... what were those, anyway? Some kind of defensive fortifications? Flood channels? Cheydinhal was dominated by the castle on the hill. Leyawin, on the other hand, situated its castle in its lowest spot... strange, really, unless it was meant as a coastal fortification. Bravil was relatively flat, but had a river being channeled through it, cutting a deep ravine (some of those shops will probably have to be moved in future years). The Imperial City was flat, though that was probably a deliberate act of engineering by the people that build it originally (going all the way back to the Ayleids, at least). And then there's Bruma. I think that one caps it.