Google's response does seem a bit heavy-handed. Under less public circumstances, maybe a strong warning would have sufficed. However, the public nature in which RG got caught forced their hand. Google could not afford to be seen as condoning such an obvious transgression of their rules with a slap on the wrist.

Again you miss the point, which is not to debate about the correctness of Google's decision, but the fact that one search engine can make the entire difference between a company being successful and not. This lack of competition is surely a bad thing, even if the decision to penalize RG specifically was a good decision.