Yes, the law of diminishing returns applies to optics, but it really doesn't start until you hit the $250 range. There is huge difference between a $100 scope and a $500 scope. However, once you get into the $400 to $500, there is not a $1,000 noticeable difference with a $1,500 scope.
Bushnell Elite 4200, Nikon Monarch, Zeiss Conquest, and Leupold VX-III. Given a similar magnification, these scopes are comparable in price in the $400 to $500 range. Now look at a $1,500 Schmit & Bender, or Upper End Swavorski or Zeiss. Truthfully, the optics are better, but certainly not $1,000 worth!
With optics, it is true that the higher the price, the higher the quality. However, to me, the law of diminishing returns, relatively speaking, really kicks in after the $500.
Let's talk about models:
Bushnell: I buy from Elite 3200 to Elite 4200.
Nikon: I buy from Buckmaster to Monarch
Leupold: I buy from VX-II to VX-III.
Zeiss: only Conquest.
Anything lower than these ranges are crap and really not a point of diminishing returns. Anything more and your are spending a lot of money, but do not get a dollar-for-dollar value.
Zachary