I have not had the opportunity to do much research on this topic, yet, but it is something for which I have an interest.
Patrick seems to be on the correct track. Looking at the iTunes Music Library.xml file, nested playlists have only one additional parameter; that being a “Parent Persistent ID” variable of type string. The latter, of course, containing the “Playlist Persistent ID” of the enclosing playlist.
An enclosing playlist appears to simply be a standard playlist with the addition of a “Folder” boolean. One would assume that iTunes simply parses the data provided by the DAAP share and if it sees the “Folder” boolean displays it at such in the library/playlist pane.
Solution one seems more in keeping with the paradigm implemented by Apple. Adding new fields for folder (as boolean), and parentID (as string) to the playlist table should cover the additional parameters needed by the client to properly feed these settings to the client. It seems unnecessary to create a whole new table just to accommodate these simple descriptors.