In this particular instance, it's actually historical. Phalangites could form a impenetrable pike-block called synaspis (locked shields) where individual soldiers stood at half the distance for their neighbours. However, this formation was immobile. And I agree that the R:TW engine is far too lax when it comes to stacking-penalties.
Incidentally, I have little problems with pathfinding in cities as long as I remember that the units should be less wide than the road (the pavement). That way they will generally stay in formation. And the A.I. often won't deviate from the road to attack my phalanx' flanks.
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