I've noticed that "nightmare mode" exists, but we have only been able to play the intro stage (going back from the main City, so starting it from the end of the stage).
We've found no way to progress past that.
I guess it will be naturally be unlocked with a normal playthrough, but if we do that I'm afraid that the characters will also be of a level high enough to make it no longer challenging enough for our tastes.
Our goal is to increase the difficulty, that's why we were trying to play nightmare mode (~lvl 45) with lower characters (~lvl 15).
If this is not possible, but there are other "legit" ways to increase the difficulty which we haven't noticed, they would still be acceptable.