your first point about diminishing returns posits a reasonable (if ambiguous) definition of (incremental) value to the consumer: that it should improve the lives of users.
but then you say...
> Google is a pretty big improvement over older search engines and is worth quite a lot although the price we pay as privacy is not obvious.
which is puzzling in light of your very own definition of incremental value.
is google's search engine so much better than bing or yandex or anything else that it deserves a much higher valuation? if you apply your own incremental definition of value to search itself, the billions of searches done on other search engines seems to contradict that conclusion. it seems the other search engines are just fine for many situations, so the incremental value of google's search is not high on either your "time" or "improvement to well-being" metric (price is hidden in ad revenue, but likely higher for google).
google's valuation broadly comes from (1) it's ad business and (2) speculation that google will conquer another industry, not from it's search technology per se, although search is certainly a core component of the ad business.
it seems to me the way that search contributes to value is that it exhibits winner-take-all characteristics (not considered in your model), so that even a slight (perceived) improvement leads people to flock to the better search engine en masse (which is how google won search in the first place, then they developed/borrowed the ad auction model and became a runaway financial success). by garnering more search queries, google has greater and better ad placement inventory (i.e., your eyeballs) to sell to advertisers.
I compared Google to "older search engines" like Altavista and Excite in the 90's. Bing and other current engines are indeed much closer to the current Google in quality than those older engines to the initial Google at its inception. The delta in quality that Google provided when it was invented was a huge factor in getting people to switch from well-established engines then.
but then you say...
> Google is a pretty big improvement over older search engines and is worth quite a lot although the price we pay as privacy is not obvious.
which is puzzling in light of your very own definition of incremental value.
is google's search engine so much better than bing or yandex or anything else that it deserves a much higher valuation? if you apply your own incremental definition of value to search itself, the billions of searches done on other search engines seems to contradict that conclusion. it seems the other search engines are just fine for many situations, so the incremental value of google's search is not high on either your "time" or "improvement to well-being" metric (price is hidden in ad revenue, but likely higher for google).
google's valuation broadly comes from (1) it's ad business and (2) speculation that google will conquer another industry, not from it's search technology per se, although search is certainly a core component of the ad business.
it seems to me the way that search contributes to value is that it exhibits winner-take-all characteristics (not considered in your model), so that even a slight (perceived) improvement leads people to flock to the better search engine en masse (which is how google won search in the first place, then they developed/borrowed the ad auction model and became a runaway financial success). by garnering more search queries, google has greater and better ad placement inventory (i.e., your eyeballs) to sell to advertisers.