Room size for hi end speakers. Too small??

16x12 is just fine.  The 7.5 ceiling may be a challenge though.
But you don't say how it's furnished and whether surfaces are soft or hard.

No problem as per clearthinker. Whether or not it sounds best at low or high volumes is actually an EQ problem very dependant on the type of music and the way it was mastered. 
Your dimensions are broken up nicely but you will still have some room modes. The trick is to place the listening position where the bass sounds best. You can also get a setup such as this  https://www.parts-express.com/omnimic-v2-and-dats-v3-dayton-audio-speaker-measurement-bundle--390-809 and know exactly what the room and system are doing. Lots of fun. You can also smooth out the room modes with multiple subwoofers.
The problem with small rooms is that more of the reflections become early enough to muddy the sound and there is less later reflection that gives you the sense of space. What you hear is equivalent to muddy headphones. Thus damping the early reflection points is more important. Putting a small pair of loudspeakers in the rear operating at a lower volume with a 50 to 100 msec delay can supply the sense of space if you have that capability. Good live recordings have that sense built in. 

For small rooms, wouldn't diffusion treatments work better than dampening? I've been reading the Toole book on acoustics and psychoacoustics of loudspeakers in rooms and he makes the case for sound diffusion to increase apparent source width (ASW) and better manage reflections by dispersion rather than dampening. Curious to hear others' thoughts. 

sjurczak, conventional wisdom is that dampening or absorption is preferred in small rooms.  This is because diffusion requires a fairly significant distance between the diffusor and the listener or speaker for the diffused field to fully develop so that they to work as intended.   The necessary distance depends upon how low the diffusor is intended to work.    6 feet or so is a minimum for most diffusors, more, if the diffusor is intended to work at a longer wavelength (lower frequency).   Traditional absorption does not require any particular distance.  Effectiveness of traditional absorbers depends on locating them in high velocity/low pressure areas for a particular frequency to be absorbed.  Limp membrane absorbers depend on locating them in low velocity/high pressure areas.