Start with your team and figure out what editing tools they are willing to use. Each choice will restrict the next selection: users, writing, editing & reference management, and version control & sharing.
In more detail:
You need a suite of tools covering a range of needs.
(Google Docs represents multiple of these at once, but nowhere near best of breed for any of them.)
I'd focus on the writing and editing. (two very related activities)
The file format matters. TeX-based file formats make a lot of sense, as do SGML formats or XML, but learning and teaching those to everyone may be beyond you.
("DocBook" is a good place to start. IIRC, DocBook is now an XML std..)
If you pick a file format that makes combining constituent files and formatting consistently simple, then you just need to handle version conflicts. If the format is text based, (as all the forms I've mentioned so far are) then you can use pretty much any of the version control software options to show your edits and conflicts betwixt.
For your version control needs, I'd recommend Mercurial. Hg uses a distributed model, so each of you is king of your own castle: you can edit to your heart's desire and synchronize when two of you huddle. If you want a central spot to act as a canon, you simply define one and use it that way.
(It can thus act as a CVCS, while retaining the advantages of decentralization.)
Git and SVG are other popular options. Turning on a document's versioning can also work in some word processors. (WordPerfect and Word among them.)
Speaking of which, if you go with an SGML or XML form, you can still edit it in certain word processors. Word is notoriously bad at this, as well as picky about formats. WordPerfect is surprisingly good at it, and allows a wide array of formats, including user-defined formats. OpenOffice derivatives are very selective in what they do, but, with appropriate extension, can work like this or even LaTeX.
If you want documents that require complex formatting and a word processor for writing and formatting, WordPerfect is best. It creates the fewest hurdles when used as intended. Note, though, it does require a very different way of setting up a document than the others, especially if you are using a non native format like DocBook.
There are multiple options for just the approach to managing references and numbering. One approach is a common storehouse of all the works to be cited. (usually stashed distinctly)
It's possible to simplify, allowing redundancy and just using end or foot notes.
Most word processors have really bad tools built-in. There are multiple competing options, hiwever, for separate reference management utilities.
For my thesis, I used EndNote, which was surprisingly good. It found all of my references and bibliography in my document written and imported them correctly into my archive. Later, when I changed my mind on citation format, it took seconds to update the entire document from parenthetical by name to classical footnotes. Saved at least an hour right there. I don't know if it supports DocBook or any of those sorts of things.
(LaTeX folks use BibTeX among other things)
One nice feature of many version control software packages is smooth integration with web service. Mercurial, for instance, can refer to repositories via uri effectively as any other path. GitHub is an example of a website providing a central stash for various projects, if you don't want to set up your own.
The level of technical ability required for some of these choices is higher, though, and the least common denominator is going to set your options. You really need to get feedback from each member to find out what they are comfortable with.
As noted, DropBox can lead to edit conflicts, but of that's the best you can get everyone to use, well, reality wins. (DB could work as a common share with Hg pretty well)
Choice of format sets editor/noted processor which determines which other tools are available. Hence, your first step is talking with the team.