Well you're not really changing Skyrim, just adding in a new mode is all.

Either way, an arena like the one I described would be tight

and get subsequently, mercilessly, and instantly cut down

So you haven't played the game.

People complained about generic enemies being scaled to the player in Oblivion, which resulted in enemies like Bandits that had unreasonably high health and much better equipment if you were high level. As a result, Bethesda severely cut down on level scaling in Skyrim, which leaves us with capped enemies, which means the generic enemies fought during the Civil War questlines don't get stronger as the player does. The end result being that players who don't do the Civil War questline at a low level won't find it challenging at all.

Honestly, I'd rather have level 6 Stormcloaks that die in one hit in a particular questline than the [censored] Ebony-clad Marauder Deathlords of High Murderous Rampaging Slaughter that started appearing at higher levels in Oblivion. Also, if I recall correctly the guards in Oblivion were scaled to always be five levels higher than the player, meaning you could have a level 67 character and the guards would be level 72 with somewhere around fourteen gajillion health. I remember having to hack and slash at Oblivion's guards for several minutes before they died on my higher level characters. Combined with enchantments that let you basically survive any amount of damage, fights between the player and scaled enemies ended up becoming battles between immovable objects, where both sides just continously hacked at opponents until their weapons broke (lol weapon degradation) or until one of the parties' insane health pool was finally depleted.

So Oblivion's scaling was certainly not the solution. I prefer Skyrim's, which has various regions intended for certain levels, with enemies that start off strong but end up being putty in the player's hands once you reach higher levels (such as Giants; they used to one-hit me, now I one-hit them), as well as enemies that are much stronger but don't appear until the player reaches a certain level (such as Ancient Dragons and Supreme High Omnipotent Terrorspreading Draugr Death Overlord of Murderous Frenzy) so the player continues to encounter opposition where it makes sense (instead of generic bandits obtaining glass and daedric equipment and inexplicable stat boosts).

EDIT: Awesome, I write out this entire post and the thread dies.

This brings up the case that perhaps certain battles should not be made up of generic enemies, but I'm not suggesting a mass riot fight against a bunch of Dragon Priests either.

For what the OP is wanting, and perhaps a better example of what I suggested, is a compromise between the low level capped generics and the I scale far better than you generic, in which case, as said, enemies that are like Giants/Ancient Dragons/etc placed into these mass battles as a decent portion of the force using what you mentioned where the AI wasn't used more than just telling the enemy to attack the player.

There's a lot of AI problems with many actors in the same cell in combat at the same time;

especially when they are oversized creatures like dragons and giants that causes a lot of pathing issues.

Not saying that the battle should be full of giants and dragons.

This.

OP, how you doing this large battle, when there's just one of you and maybe a follower? So, you against 40,50,60 others? Or are you thinking of the M-word, multi-player, because that won't happen.

PS: Not even modded for the PC.

why dont you just play mount and blade: warband?

Well obviously you'd have allies in the castle siege idea

EDIT: And no, I wasn't. I'm all for a co-op mode, but all my suggestions in this thread have been for singleplayer.