What are we really trying to replicate?

I can't speak for anyone but myself,so keep that in mind.I listen mainly to rock music and frankly,I don't want my system to sound like a live concert.Have you ever been to a rock concert?If you have then you know what I mean!!I go to concerts to hear the improvisation that most bands do during their live shows.I have only attended a few concerts that I would consider sounding as good as my system.Pink Floyd's "Animals" tour at the Olympia Halle in Munich,Germany stands out as one of those few.Opinions vary so you are surely free to disagree with mine.

I agree with your basic point. Few things irritate me more than attending a "live concert" and instead hearing the PA system, which is certainly inferior to my home system in all aspects but ultimate sound pressure levels.
Acoustic instruments are the result of centuries of evolution and refinement, and as previously noted, are impossible to reproduce. I applaud the "unplugged" movement in popular music. Unfortunately, however, PA amplification has intruded into many traditional acoustic music presentations, like opera and folk music. This robs the audience, especially the young audience, of discovering the difference.

(1) At what point does the level of an audio system exceed the level at which it was recorded and/or transferred to media?
I think the answer is simple, if you are looking at it incrementally you stop improving your audio system when the improvements stop adding to the enjoyment of the recorded music you listen too.

I've come to a very simplistic conclusion on this and it's that somehow the ear and brain knows when the music being played through a system sounds musically right and engaging. If your system does this, what else is there to strive for? There will always be recordings, as well as live concerts that just suck! I think in a good system, a studio recording should sound like you are listening to the music the way it was recorded in the studio and not how it sounded in an arena or stadium. Let's not forget that we don't close our eyes at live concerts, so the brain is also impacted visually. With all of the possible variables, it's up to you to either simplify or complicate
the matter. Watching a baseball game on TV can never be the same as being at the game, same thing for this striving for an Absolute Sound!

Watching a baseball game at home is much better because it can be turned off!

I should try to clarify that I'm not saying that a system can sound "too good" in the sense that I don't think people should even want better system, just that at some point we're investing more into playing something than was put in to produce it. Think of it as putting a doodle sketch in a 1,000 frame. Would it be worth it? Only if your kid drew it.

I'm not judging anyone for spending a ton on audio, I would happily spend more if I could justify it.

Have you ever had a bunch of people for a "music party" to specifically listen to an artist as though it was a concert at home? This could be either a true audiophile event in your audio room or an outdoor blast session.

Since I've had my speakers, I've had a few friends over several times to just sit on the couch and relax listening to music. It's an enjoyable time to be sure.