I think there is a practical difference between a 2-party system and a n-party system where n > 2. It's not what you think, though, and I'm not sure which one is really better in practice.
At least from my observations, a two-party system produces heavy polarization. Nowhere have I seen such a polarization as the one in US between Democrats and Republicans. Everyone is sure that their POV is the good one and cannot comprehend how someone can possibly support the other party. As you say, you can choose your flavor of police state.
A system of three roughly equally big parties, however, seems to emphasize consensus. As none of the three parties can hope to form a government alone, they will need to secure the cooperation of at least one of the two other. None of them can afford to become the lone different party, because that would just result always in the other two parties forming a government (unless the winning party manages to persuade enough smaller parties to join a coalition government with the two other parties left out). The result is that you have three basically identical parties that are more or less only differentiated by how they market themselves. Of course there are politicians in the parties that would like to be different, but in order to secure a government with another of the parties, you will need to make concessions, which usually excludes the points of view that are unique to one party.
So, the end result is that you can choose from three flavors which are not really that different. Not that consensus policymaking would necessarily be bad - it's not.
In my country a fourth big party has recently emerged. It will be interesting to see how this affects the dynamics as we've only seen something like two elections where this was the case.
Of course it also depends on the system used in elections. I think the US-style "winner takes it all" system basically forces only two big parties to emerge.
Still, as someone who lives in a country with more than two big parties, I don't think I'd ever want to see a government effectively controlled by only a single party, not for any period of time.