I think D2 is more competitive in the sense that it has, in many worlds (can't speak for Allen) become a sort of "holding pattern" for people waiting to see D1 improved from some of the frequently voiced shortcomings we hear. Coaches have dropped from D1 back into D2 because they like the game better, so you have a good density of humans-to-sims that isn't found at either of the other divisions and the number of coaches who know the game's ins and outs is high.
D3 is more competitive in the sense that I think it is the most challenging to build and maintain a consistently strong program at. Due to the scholarship money and the limitations it puts on recruiting, D3 requires you to accept flaws in one player and then counter that with a corresponding strength in another...etc. etc. etc. It's a game of accepting weaknesses where and when necessary to cash in on a certain player's strengths.
Getting into a league with other humans isn't necessary, but is useful. For one, you get to watch and see how other people play the game and steal little things you see in their style for yourself when it becomes useful. The social element of having an active conference chat board is nice. The biggest reason to do it, however, is the postseason cash. If you get into a league where multiple people are making deep runs year after year, you can easily find yourself recruiting for 3 openings with the cash equivalent of 4.5-5 scholarships. (be aware this might be changing with the eventual upcoming alteration to recruiting...I don't think we've definitively heard what happens with postseason recruiting carryover cash in the update yet).