One of the most common complaints of long time fans of the series was that Oblivion was too bland. Many have compared it to a Tamriel version of Middle Earth or even a generic high fantasy game. In fact even people who began the series with Oblivion (such as myself) but have played all the other games as well see the validity in such an argument. After the political complexity of Daggerfall and Morrowind it seems that Cyrodiil missed out on having similar depth to it's game world.
Take the Pocket Guide to the Empire for instance, which speaks of a far more interesting Cyrodiil with it more varied substropical invironment and interesting peoples. The Imperials are so generic in Oblivion compared to what is read about in the PGE such as evident here: http://theskyrimblog.ning.com/group/lore/forum/topics/the-imperial-divide-colovian-and-nibenese.
Now back to the original question. When I say "Did Oblivion take place in the wrong setting? I'm not basing that around the main quest but the direction Bethesda chose when creating this game. As I stated before, Cyrodiil is supposed to be a far different place than it's portrayed in-game. Most likely in an attempt to cater to an even larger audience than Morrowind, Bethesda decided to make Cyrodiil into a Tolkien landscape and created some last minute lore to cover that decision.
Now as to what I believe the proper location to be? High Rock. I know that just two main games before Oblivion we had Daggerfall which pretty much took place in High Rock so that seems rather redundant. If one looks at the fact that Daggerfall was not only released back when TES had a small following (so it would be new to most) and the landscapes and randomly generated design along with dated graphic actually left more to interpretation than anything. Also considering that in terms of Elder Scrolls lore High Rock is the perfect place to attempt a Lord of the Rings or Harry Potter feel then naturally it would be the the better suited province for the direction Bethesda has gone with Oblivion.
Agree or disagree? I'd like to hear other's takes on this inherent flaw with Oblivion's design.