It depends on what you are trying to convey. Part of the difference comes down to whether the speaker is a crowd or several individuals, and the other part involves the distinction between direct and indirect speech.
- In terms of the quotation marks, you use two different options.
- The option in #1 and #2, with quotation marks at the beginning and end of the group of utterances, suggests you are quoting the crowd as the speaker, and so conveying collection speech. The absence of inner quotations also suggests an element of indirect speech--that is, speech that is being reported by someone rather than being directly quoted. That works well for capturing the sense of overhead snatches of a conversation.
- The option in #3 and #4, with quotations around each different speaker, suggests individual speakers in a conversation, and you keep their individuality more to the fore. The quotation marks emphasize that this is direct speech, as well, i.e., something you are repeating directly.
- In terms of capitalization, you also have two options: treating the utterances as part of a single sentence (#1 and #3) or as separate sentences (#2 and #4).
- A grammarian might say that #4 is correct, since every sentence must start with a capital letter and each speaker must be differentiated, so quotation marks are each are in order.
- But are you trying to convey sentences? or sentence fragments? The latter do not need to be capitalized, so capitalization in #1 and #3 and just as correct as #2 and #4. It comes down to the effect you want to create:
- a formal conversation where one-word utterances imply a complete sentence ("Great" implies "I'm doing great").
- an informal conversation where short utterances are sentence fragments.
If you are trying to convey a sense of crowd speak to your reader, then #1 is the most effective, because it captures the sense of overheard snatches of a conversation (indirect speech), where you hear fragments, not sentences. But if you mean the dialogue as a clearly heard conversation among distinct individuals, then either #3 or #4 are more effective, depending on whether this is meant to reflect a formal (#4) or informal (#3) dialogue.
One other option is to omit the outermost quotations altogether, to emphasize that it is indirect speech, as in:
- The conversation in the next room was banal: Hey—how're y'all doing?—great—you?—yeah, good.
These are excellent examples of the different rhetorical effects that can be accomplished through a self-conscious use of punctuation.