Italy was chaos for most of the middle ages. Large northern Italian cities like Milan, Venice, Genoa, Pisa, Florence, Bologna, and Siena all were run by oligarchies representing the cities' commercial interests. In the south Naples and Sicily were a united monarchy, just as is represented in the game. Italy had wealth due to extensive trade, but politically it was hopelessly fragmented. Occasionally the cities would join together to fight France, the HRE or Papal forces, but mostly they just plotted against each other.
Unlike the sentiment that was developing in France and England at the time, there wasn't a movement among all Italian-speaking people to begin seeing themselves as a distinct nation (the same situation existed in Germany). That would have to wait until the 19th century.
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