I can't see and east-west or inner-outer division for the simple fact that Michigan and O$U would be in the same division. You have to think that the B1G officials have it in their mind that a UM vs O$U championship game is best for the conference.
One thing I do see is that both the east-west and inner-outer scenarios seem to keep most of the major rivalry games in play.
If I had a vote. I'd vote Option 1
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Sometimes people standing on third base think they hit a triple, but they didn't - Jim Harbaugh