Alternatively, the market for premium subcompacts is sufficiently small that it doesn't justify the cost of making them comply with market regulations?

Possibly, though they seemingly pulled the model 1 in the US due to low sales figures. It’s hard to advertise cost effectively to both the top and bottom of a market. Dealerships also have huge incentives to sell used 3 series over new 1 series. It’s a little different in Europe as the utility of tiny cars is much higher there.