About elimination of advanced weapons: this sounds much better, especially if it means we would be finding more exotic weapons in their place. In theory, having 12 mods on your weapon sounds pretty cool--but the odds of having the stars align enough for you to find the advanced weapon you need, plus all the mods for it, in a game where your build includes 2 levels of whizkid, is practically zero. Unless you're playing Ao100, I guess. But even then, exotics might be better.
On MAD shotgun versus Ammochain: both have their strengths and weaknesses. Shotgun builds are awesome against massive hordes and pretty good against strong individual demons, while ammochain is pretty good against massive hordes and awesome against strong individual demons. Which is better would depend on the situation--how big the group is, and how strong the demons are. Either one would work pretty well though.
And finally, back to the original topic: I think diminishing damage reduction sounds best. I don't like the idea of narrowing the cone--that would make the shotgun slightly less useful in one way. And I think mods should always improve the weapon or armor you use them on.