I have seen the Phocians and Tyrants attack each other.
That seems to be the problem, you have to see them doing it. They don't do it behind the scenes only when two forces trying to get to you run into each other.
For the capaigns i can understand it, it would not make much sense to put Alexander of Molossis on the throne of Epirus as a mission if the Illyrians had taken over for example...
But in sandbox mode I would like to see some AI development, maybe even a kind of spy system where you can see other areas without actually having military units present (invisible spies maybe?). This could work well if you could also influence a side to attack another side, either through money bribes of a chance based 'false evidence' kind of spy mission. Lots of room for development.
Yeah I agree they need to fight each other as well. Otherwise it seems like they are just waiting to be conquered by you. Besides if they fought each other, it would open up a lot of strategic options, like gaining a peace treaty with one side and waiting till the two factions strongly weaken one another then going in for a kill on both factions. Extremely accurate historically as well as today. Plus a LOT more fun.