On the whole, its not a bad tactic. Have they discovered Enlarge Person to get that sweet +4 size bonus to Intimidate checks (as well as increasing the area they threaten, and can therefore Intimidate in)?
Frightened characters will fight if they have to, taking the same -2 to almost everything that Shaken characters get. Its not the worst thing in the world to eat a -2.
If the party isn't challenged by one guy, send more guys. If the caster is firing off a Cause Fear every round, and the other character is burning an standard action on an Intimidate check every round, that's eating up a lot of actions and spells. Intimidate only lasts 1 round, and retries are listed as "Optional". (Personally, in a normal-sized group, I'd be thrilled if a PC gave up an action every round to keep giving an opponent a -2, but that's just me. If you think its disruptive, you could easily kibbosh retries.)
Also, Cause Fear only works on living creatures and creatures with minds, so its not like you are totally without options in that regard. (Undead, constructs, ooze, and vermin are the short list.) And it has a 6 CR cap, which the monsters they fight will outstrip in the next couple of levels. Then they'll be burning a 4th level spell to scare people, and thats few levels off.