I think the concerns about the competition go both ways but it isn't a major factor to me. Think about Karl Malone and John Stockton and even Steve Nash, they all went to small schools and didn't play against the greatest competition. There are many examples of players succeeding and failing from both small and big schools.
The real question is, "Does the kid have NBA talent/skills/heart/work ethic?" Players certainly need the physical talent to make it in the NBA, but what keeps them in the league is their approach to the game both mentally and physically. I haven't seen Lillard play very much but from what I've see the kid has NBA physical talent and an NBA type game. He seems like a good kid who works very hard. I would have no problem picking him over Marshall. I think it is a toss up between the two. It depends what you are looking for when you are drafting. If you want the best passer then you take Marshall and you take Lillard if you need shooting or scoring. I personally think the Jazz need a PG who can shoot as well as pass and for that reason I would take Lillard.
However, I will have to see how both compete at the combine to push me one way or the other. This potential decision is similar in ways to the decision to take Hayward over George. Both players turned out to be very good and I believe both teams won with their picks. It is funny how people are still debating who was the better pick. I am sure the debate between Marshall and Lillard will continue even after the draft.