Since actual particle hair strand collision doesn't seem to be on the core developers' menu any time soon, and recent community efforts (yay!) are still in the works, I decided to try my hand at a reasonable fake method I had in mind. From the attached .blend's text file:
A Faked Hair Collision Method for 2.5x and above
Because Blender 2.5x and beyond does not include reliable collision in its Hair Dynamics, I've developed a workaround using the Cloth sim, which does have decent collision if set up properly.
The basic premise is to not have the hair collide, but rather have the hair emitter mesh collide, by turning it into a Cloth object. The hair emitter mesh is divided into long strips that respond much as fat flat hair strands would, and the particle strands emitted by the mesh follow the motion of the emitter to a large degree. The particle strands do not actually collide, though that's what it looks like is happening -- in other words, it's a fake, but a pretty good fake.
In this prototype, the Cloth emitter is designed & specified to move somewhat like hair, and the hair is designed to have only a minimal response to the motion via Hair Dynamics. The majority of hair strand motion is from the emitter as Cloth, but the small amount of Hair Dynamics used makes sure it has some natural motion on an individual strand level as well. Turn off Hair Dynamics during playback & you'll see how much it adds to the illusion.
It took me a while to devise the parameters for the Cloth emitter and the Hair Dynamics. The values I'm using are model-specific, so be prepared to experiment with values on your own models. The general idea is to use fairly high values for Mass and structural stiffness/bending, The collision object values are important as well.
Areas to experiment beyond the physics simulation values include emitter mesh density, number of emitter "strips," particle strand density, use of particle Children, and of course how to use this on an actual character model by building a "wig" made of cloth strips that emit hair.
One method of building a "wig" is to create a continuous mesh to begin with, then after it's been given a basic shape, delete alternating rows of faces to form the strips. You can apply the particle hair system either before or after this step, but as usual any final "grooming" in Particle Mode will have to be done on a finalized emitter mesh.