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I would suggest not placing "widget-dealers" in any of the urls aside from the page that actually has the location search and bulleted list (which I'd assume is http://website.com/**widget**-dealers). Any state pages or location-specific pages could simply be structured as http://website.com/dealers/tennesee and http://website.com/dealers/tennesee/nashville respectively. This puts both the state and location closer to the start of the url; not to mention that shorter urls are generally better.

However, if you're adamant about using one of the 3 options outlined in your question, option 1 would logically be the correct structure as it tends from general to specific. The structure, from what I understand of your site, wouldn't make sense in the other two options.

I'd probably go with Yahoo, if only because it's a search engine that people do still use. However, another option to consider would be to join Yahoo local business (which is free) and BOTW.

I had this same issue not more than a few months ago; it seems that the option Google recommends is to delete the listing(s) you don't prefer. Unfortunately, this is currently the only viable option. If you have followers on the one you intend on deleting that aren't followers on your preferred listing, I suggest inviting them to follow the one you save.

Yes, doing that is cheating, though not inherently "black-hat". However, it's also foolish to do that for a number of reasons: one of which is that you're putting an entire website in a sub-folder of the actual website. Another is that even with the canonization, they're forcing competition between these pages/sites. Even if they're not being penalized for it now, Google, Bing, and Yahoo will all eventually catch it and that'll be the end for them.

A general rule: if you have to question the morality of something, it's probably wrong.