Sajad clarifies: "OK, this phrase belongs to a story called "Twilight" and the paragraph that contains it, is: "It looked like I was going to have to do something about Mike, and it wouldn't be easy. In a town like this, where everyone lived on top of everyone else, diplomacy was essential. I had never been enormously tactful; I had no practice dealing with overly friendly boys." It is a use of the phrasal verb "on top of," which can mean "to be well-informed about." It means that she needs to "use diplomacy" and be tactful, because Forks, Washington is a small town and everybody is well-informed about what everyone else is doing. It does NOT refer to actual position, above and below. It does NOT refer to physical crowding. According to Wikipedia, _Twilight_ is set in Forks, Washington, which is a real place, with a population of 3,532. Thus it is not a dense metropolis where people live in high-rises or feel physically crowded. It is a place nobody is anonymous, nothing can be kept secret, everybody knows each other, and everybody hears about what everybody else is doing. You can say: --Everyone is well-informed about what everyone else is doing --Everyone is well-informed about everyone else --Everyone is on top of everyone else I think the word "lived," in "lived on top of" emphasizes that this is a small town where gossip really is an important part of the local way of life. Not only is everyone on top of everyone else, but gossip is an important part of the life of this small town. So she needs to be careful in discouraging Mike. She can't just tell him "go away and stop bothering me," because the story will get around and other people may get angry at her. She will have to "use diplomacy" and work in a careful, gentle way.

It's hard to know what this means out of context. It could mean that this person lives on the top floor of a building, and everyone else's homes are on the lower floors.

It's not a common idiomatic phrase. If you would give us the full sentence and a couple of sentences preceding it, we might be able to give you an answer.

When many people are living in a close, crowded area. It's an expression, saying that it's so crowded people are piled on top of each other.

Upon Sajad's clarification, I think it is the figurative use of "living on top of one another" to mean "this community is socially claustrophobic; socially, everyone knows everyone and they gossip about one another". It is the figurative use of "living overly close to one another". An example: "In New York, the community of rich men's wives and daughters who sit as trustees of museums and the Met is very small and very competitive. It is a tribal village. They live on top of one another. A woman in that situation has to be very discreet and clever in order to preserve her freedom." "O I thought it was much more liberal and kinder than that." "Don't be naive!"