I opted for the lavatory when we took my son on a plane.
I should mention that I'm a pretty big guy: 6'3" or roughly 190cm. Standing in that lavatory, hunched over the rudimentary changing table... let's just say it wasn't fun. Or comfortable.
Yet I'm not convinced in the seat would be any better, even if you ignore the issue of consideration for your fellow travelers (and I feel that's a pretty big issue, especially if you don't have the luxury of having the entire set of seats in your section of the row for just your family members).
Even more important, accidents happen, especially on a plane experiencing some degree of turbulence. In the event of something going somewhere it shouldn't go, you really want that sink to be close. It may be only an airplane sink, but its a source of running water, and that could be a critical component in a "worst case scenario".
If you do have to change in the lavatory, bring everything you need, and nothing more. Don't bring the whole diaper bag. Just bring the diaper (and perhaps a spare, just in case), wipes, disposal baggie, etc.. Only the bare minimum for the changing. The amount of space you'll be dealing with makes extra items like the diaper bag more of a liability than an asset.
Tying up the lavatory is not something I'd worry too much about. Many commercial planes have multiple lavatories, anyway. Those that don't are (in my experience, anyway) usually planes that are either for short trips, or the sign that you're on a "bargain" class airline (if I recall correctly, Ryanair, for example, saved some money by stripping out one of the standard lavatories on their planes in order to fit in an extra seat). Regardless, changing a diaper is a perfectly legitimate use of a lavatory, so if you're tying it up, at least you're tying it up for the right reason.
Your best bet, for short flights at least, is, of course, to change the diaper before the flight, as close to boarding time as is feasible, and hope that you can avoid having to deal with changing the diaper on the plane altogether. That's not always possible, of course, but one can hope.