Every point you have just made it sound and valid.
Did your parents actually witness the frenzied opening of the gifts last year, followed by all the frustration? If so, I would think they would automatically adjust their buying to keep things a bit lower key. But if it's jealousy and 'like me the best' routine going on then perhaps not.
I would feel very confident asking them to invest in something wiser. But you are going to have to accept one of the solutions, i.e. one of the outcomes that you outline in your own question. There is no great solution when the motivation behind the giving is to gain favoritism.
My children have also been the recipient of too many extravagant toys and clothes from my in-law side. And I have returned many items for something more practical. The kids won't know the difference at this age. I don't think it sends a punishing message, but rather a good steward message. We just don't need all the stuff.
Which is my new favorite word: our society suffers from "STUFFOCATION" - we are suffocating from too much stuff to manage in our lives.
So, it's ultimately not your long term problem how they respond. They will either do graciously or ungraciously and it seems you are trying to circumvent the later. You and hubby should think about your family future needs/wants and make it known to them without feeling any guilt whatsoever. We finally asked my husband's side of the family to send just one gift per child and preferably something for their college funds. We did have to set up a college fund though and send them the account info. They still prefer to buy gifts, as come on, it's Christmas and they enjoy buying toys just as much as anyone.
I don't know if this helps, but honestly, you shouldn't feel stumped. You sound very articulate and logical about how to manage the holiday's differently this year.