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Although Google has been trying hard to blur the lines between legitimate search results and ads, there's still a distinction. For the results that aren't ads, they legitimately try to rank the best results first. After all, if people stop using Google search, they won't make as much off selling the search ads.
The bad "legitimate" results near the top of the search are often the results of people gaming the Google algorithm(s). SEO is still a cat-and-mouse game with Google, and it often works. If there were legitimate competition in search engines, SEO people would have to optimize for multiple search algorithms and it wouldn't work as well. But, since they only have to target Google, it often works well. That's one of the reasons you get bad recipes with tons of junk content before you get a tiny recipe when it's a recipe you're searching for.
A smaller search engine will have the benefit of not being the target of SEO optimization. OTOH, Google's massive scale and huge investment in search does give it better results when it can beat the SEOs. It searches deeper and is much more recent than a smaller alternative could afford to be without spending hundreds of millions on infrastructure alone.
Google has a great advantage in the SEO cat-and-mouse game (being able to hire and pay many very smart people). I think part of the problem is that Google has an incentive to not penalize pages with excessive and intrusive AdSense ads.
But, also a great disadvantage in that it's the target of every SEO scheme. If a change in SEO strategy results in a link going one higher in Google, but 200 links lower in Bing, the SEO folks will jump on it. That means Bing gets to focus on improving their search engine without really worrying about SEO.
Also, I think many smart people with principles are starting to shy away from working for Google.
I doubt that comes into it at all. AdSense doesn't really care how much traffic a page gets, just that whenever it gets traffic, they get a cut. AdSense has millions or maybe tens of millions of customers, and by the fact they're using AdSense, they're too small to care about. Google only cares about them on aggregate the way they do with Gmail users or YouTube viewers.
Search is an entirely different business unit and their #1 job is to maintain their monopoly on Internet search. One of the main ways they do that is by keeping up the quality of the results so that they don't lose customers to Bing, Duck Duck Go, or whatever. If another business unit in Google approached them and said "hey, can you lower the quality of your search results to send traffic our way?" They'd laugh and say no. The only way it might happen is if they're trying to drive traffic to another Google acquisition that's a strategic investment, like say putting some Google+ search results up first.