Does it work on the Wifi models, without the GPS in the 3G?
You mean near? Yes, it will try to use skyhook, or whatever it is called. You can improve your own location by adding your wifi router to skyhook at the official site.
So when Sony takes advantage of a die shrink, they could save themselves money and get better battery life. That would be the traditional console/handheld model.
But the Vita is competing against mobile devices, which are using die shrinks not just to reduce costs but to increase performance.
Increase performance vs cost. And in that equation, Vita can play along precisely by staying fixed hardware - it will benefit from all cost decreases, having powerful enough hardware to stay current for quite a while (also in terms of shared manufactoring resources), but at the same time have a much higher performance vs cost ratio thanks to proprietary software being able to specialise for and get the most out of the Vita.
Maybe a year or two from now, Sony would need to increase clock speed or improve/increase cores to put out a more competitive product, even at the cost of fragmenting its installed base?
So, no, they would never do that. The important question you have to ask yourself here is 'more competitive at what'? It will take a long time before phones and pads have more powerful hardware at comparable prices (though perhaps not that long), but then it will take a lot longer than that before the hardware is powerful enough to absorb the additional abstraction layer that iOS/Android/Metro bring.
At least that is my understanding. The Vita would be more compelling at $99 with all its analog sticks, dual touch-screens, dual cams, gyros and what not when it has a large selection of games that also makes the most of its quad-core gpu and cpu, and it will be a long time before any similarly priced phone or tablet device can offer anything of the sort.