There are many possible explanations which have been considered. Here are a few:
The premise of the second explanation may technically be correct. But the number of stars, finite as it might be, is still large enough to light up the entire sky, i.e., the total amount of luminous matter in the Universe is too large to allow this escape. The number of stars is close enough to infinite for the purpose of lighting up the sky. The third explanation might be partially correct. We just don't know. If the stars are distributed fractally, then there could be large patches of empty space, and the sky could appear dark except in small areas.
But the final two possibilities are are surely each correct and partly responsible. There are numerical arguments that suggest that the effect of the finite age of the Universe is the larger effect. We live inside a spherical shell of "Observable Universe" which has radius equal to the lifetime of the Universe. Objects more than about 15 billions years old are too far away for their light ever to reach us.
Historically, after Hubble discovered that the Universe was expanding, but before the Big Bang was firmly established by the discovery of the cosmic background radiation, Olbers' paradox was presented as proof of special relativity. You needed the red-shift (an SR effect) to get rid of the starlight. This effect certainly contributes. But the finite age of the Universe is the most important effect.
References: Ap. J. _367_, 399 (1991). The author, Paul Wesson, is said to be on a personal crusade to end the confusion surrounding Olbers' paradox.
_Darkness at Night: A Riddle of the Universe_, Edward Harrison, Harvard University Press, 1987
updated: 24-JAN-1993 by SIC