Here's a great article by Eric Asimov, the main wine writer for the New York Times. He addresses the recent studies that have been done claiming to show that prices of wines do not reflect quality.
I would add one thing to Asimov's analysis: sweetness of the wines affect people's perceptions of them. Dryer wines tend not be appealing to novice or casual wine drinkers because, like whiskey or beer, they are an acquired taste. For many, if not most, wine drinkers, the sweeter wine will almost always be the preferred choice regardless of the wine's other qualities. And since a $5 Cabernet will almost certainly be sweeter than a $50 Cabernet, it stands to reason that many people will say they prefer the $5 Cabernet. This is why so many large producers (see my post below) often sweeten their wines.