OSU goes, but you are both wrong on your reasoning. The following assumes OSU beats MSU and UM beats OSU (and everyone wins out all other games):
(b) If three or more teams are tied, steps 1 through 8 will be followed until a determination is made. If only two teams remain tied after any step (or sub-step), the winner of the game between the two tied teams shall be the representative. If three or more teams remain tied after any step, move to next step in tiebreaker with remaining tied teams.
1. The records of the three tied teams will be compared against each other.
All 4 teams finish conference play at 7-2:
OSU is 2-1 against PSU, MSU, and UM
MSU is 2-1 against UM, PSU, and OSU
UM is is 1-2 against MSU, PSU and OSU
PSU is 1-2 against UM, MSU, and OSU
UM and PSU are eliminated under
1. The records of the three tied teams will be compared against each other.
OSU and MSU are then compared and since OSU would have beat MSU head to head, they are the winner of the division.