I come from a family where it is very obvious who are the favorite grandchildren AND children. Both sets of my grandparents did not hide who were favorites and my parents did not do a good job of hiding their favorites. My parents are even worse with my two sons.
I think it is good to let kids work things out on their own sometimes. But I don't think it is ever good to encourage kids to hit it out and have a "boys will be boys" attitude with confrontation. My brothers were extremely physically violent towards each other and towards me. My parents encouraged it. They also encourage it with my sons which is COMPLETELY unacceptable to me. However, my parents have no respect for my rules for my kids and whenever we discuss this, it turns into drama and I am the bad guy.
My parents respect my husband more than me so he has talked to them a few times, but they haven't changed. I have limited my contact with my parents, but cannot cut them out completely because we need depend on them for child care once a week. We have disallowed them to come over early, though. For example, if I start my night shift at 10 pm, I do not allow my mother to come earlier than 8pm. This makes her angry, but she does not connect (or possibly does not want to connect) the conversations we have had about how my husband and I want to handle our kids behavior and playing favorites with them when we aren't there, even though we have explicitly explained why we want things this way.
But things are very tense with them and it is pretty unpleasant. They have no issue with having a favorite, praising him more than the other grandson in front of the other grandson, and then allowing conflict to go to extreme levels.
I hope that you and your husband can work something out with your family that will help. I have found in my case though, that because my parents don't want to change and see nothing wrong with their behavior, they will most likely never change no matter how much I beg. I hope your family is more reasonable. :(