I stumbled across an answer that seems to have worked. Too bad there is not a cleaner way to do this than to alter the default settings. Would rather the System Settings|Power setting worked.

I edited the file '/etc/systemd/logind.conf'

sudo vi /etc/systemd/logind.conf

Then I uncommented the line (removed the beginning #) containing 'HandleLidSwitchDocked=ignore' and changed the value to be:

HandleLidSwitchDocked=suspend

After a reboot all seems to be working as expected, though I'm still prompted to login twice. (Once to unlock, and again as a user of the OS.)

Per investigations at the end of the question, the issue appears to be caused by GDM running a redundant gsd-power process. This can simply be killed as soon as you log in. Here's how I've done it:

1. Create a kill script as follows:

   script=~/bin/kill_gdm_gsd-power.sh
   cat > $script << EOF
   #!/bin/sh
   sudo pkill -u gdm gsd-power
   EOF
   chmod 755 $script
   

2. Your account will need to be allowed to run sudo pkill without a password prompt (make sure you're comfortable with this). Run sudo visudo -f /etc/sudoers.d/NOPASSWD and enter the following

   Cmnd_Alias PKILL = /usr/bin/pkill
   user ALL=(ALL) NOPASSWD: PKILL
   

   (replace user above with your own user id)

3. Open the GNOME startup apps applet (gnome-session-properties) and add an entry with your script, so it runs as soon as you log on.

Ideally we'd find a way to prevent gsd-power from starting up altogether but I found this non-trivial... Please chip in if you find a better way.

A slightly cleaner solution might be to cook a custom handle-lid-switch script per this solution but the script would primarily have to be installed for the gdm user and this may also not be trivial...

There might be some side-effects to killing gdm's gsd-power process, eg: if you log out and leave the laptop to the GDM greeting screen but I think this isn't a scenario many of us will run into.