Forgot to add that the one place where the price is heard is in acoustic guitars. $1k on an
acoustic guitar will blow away any $500 or lower guitar hands down in both playability and sound. I've had that argument many times both online and in person. The argument gets settled everytime when I let the person try my guitar. And mine isn't even the greatest. Go to any high end shop and try a Breedlove, Collings, Santa Cruz, etc and compare that to the plywood at the local big chain.
It's certainly easier to pin down on acoustics of any kind!
The most recent guitar I bought was a lovely Burguet Noguera (classical). I tried a whole bunch of instruments and they were all very different in noticable ways.
I've never understood how the various woods in an electric guitar contribute to the sound, other than affecting the sustain, although I'm willing to believe that they do.
Expensive guitars do usually play better and are often better designs and come with nicer features.
The last electric I bought was an American Deluxe Strat, and a/b testing it against a regular strat was like night and day. The electronics and pups in the regular strat were naturally totally different, and I much prefered the deluxe. It had much higher output and the SCN pups, although not a traditional strat sound, were 'stratty' enough and made a noise I really liked.
I felt that the deluxe also played better. Jumbo frets made a big difference. The model of deluxe (
http://img3.musiciansfriend.com/dbase/pics/products/4/8/3/229483.jpg) I ended up with also has a much nicer feeling neck and lovely fingerboard.
The extra features also made a big difference. Decent locking tuners, straplocks, S1 switching, nice leather strap.
Naturally you could put most of these things into a cheaper guitar - right down to changing the neck!
Once you start changing things out, you have a different instument though (I don't think the strap makes too much difference - who knows though, maybe you will find your perfect tone with the right strap!

).
There is certainly a place for cheap-ass axes though! In some situations they can shine.
I'd like to add that one of the most 'kinky' (in a good way) sounding guitars I ever played was one of the worst playing. It was some lightweight thing from the late early 60's ('star' something? I wish I could remember), they made an edition with a speaker in it I think.
It played like total crap, but had this unique sound...
It only did the one thing - but it did it so well, really beautifully nasty sounding thing.