Can Drupal be used for hierarchical multi-site? Can you use Drupal to make a site hierarchy?
The main reason would be managing permissions and general connections between sub sites, like the following one:


                       Site 1
        Site 2         Site 3         Site 4 …
    Site 5   Site 6                   Site 7 …
This is a very vague question in that it doesn't give any semblance of the relation between the sites, or how they link to each other.

There are at least 3 different ways to make a unified site using multiple domains/subdomains using drupal:

1) Organic Group/Taxonomy/User based subdomains.

Each Group, Primary Taxonomy, or User gets their own subdomain, and their content is listed there.  Cross domain login issues are relatively mild, and just a matter of fixing the cookie domain as .domain.name, where the subdomains would be group.domain.name or user.domain.name or term.domain.name.

2) Domain Access based domains

This is more an "affiliated network of sites" concept.  Content is assigned to a specific site, and can be shared among all sites, or specific only to one. You link sites together using modules like Views as you can select content in any way you please, and give each site an individual look, or maintain a more consistent network theme.
  This can be implemented either as domains or subdomains, so cross-domain login issues are possible here, and can be difficult to mitigate effectively if you're trying to give an integrated feel.  SSO is one possible way to solve the issue, but other tweaks, such as pulling the login id across domain boundaries is also possible.  (This takes a little bit of technical wizardry)

3) Drupal sites based on a single install

All the sites share a code base, but each has their own database.  Automated links between the sites would need to be done through communication channels like RSS or RPC, or else maintained manually. As the user databases are separate, there are no common logins across sites.  SSO is probably a must in this case.

What solution fits your specific needs is not apparent from the question you're asking here, so please narrow the scope of your question by providing details as to what you mean by "site hierarchy".  What specifically makes otherwise unrelated host names (or domain names) into a hierarchy?