Competitive antagonism means caffeine and adenosine compete for the same site. The fraction of receptors blocked by caffeine depends on the ratio of caffeine concentration to the total receptor number. If upregulation increases the receptor pool while the caffeine concentration stays the same, the fraction blocked falls. More free receptors means more adenosine can bind, so the net inhibitory signal is larger and alertness is lower.
Tolerance is a rightward shift of the dose-response curve: a higher caffeine concentration is now required to produce the same degree of receptor blockade and the same level of alertness. The drug and its clearance are unchanged; the receptor system has adapted.
Tolerance is not the drug failing to reach its target. Caffeine still binds A1 and A2A receptors with the same affinity. What changed is how many receptors are available to block, so the same concentration now occupies a smaller share of them.