To give better examples/analogies: If I were looking for a nice hotel in city X, and the Hyatt Regency (not to be confused with Park Hyatt properties though) was available for $349 and the Ritz-Carlton at $475, I would no doubt opt for the Ritz, because like the previous poster said, I understand and value the difference in an upscale hotel (Hyatt Regency) and a luxury hotel (Ritz Carlton) and to me the $120ish dollar difference per night is worth it to be able to stay in a luxury hotel as opposed to an upscale hotel.
Also, with luxury hotels, they are not as obvious or blatant about advertising special values and kick-backs which often makes the hotels LESS than what hotel like the Hyatt Regency is charging normally just for the room. (IE: The Ritz will regularly offer discreet rates--during off seasons--which offer complimentary breakfast for 2, one night free when you stay five or more nights, $100 credit per day, etc)
However, to add more wood to the fire, personally if for example a hotel like the Ritz-Carlton were available for $475, and the Peninsula at $775, I probably would NOT pay the extra $300 unless A) I loved loved loved the Peninsula B) The category of room was different and this was important to me during this trip C) It offered some sort of value added amenities with my rate (AMEX for example) which I would take advantage of.
However, that is just me. This is something that I think is very individual-specific. Some people when they travel have one hotel and just one hotel in mind and don't care how much it costs. I do have this mind-set with some cities because I know that when you have a wonderful experience in one hotel, its nice to come back and already know what to expect. However, with some, where the luxury hotel choices are a dime a dozen, I am more open, NYC, for example.
It all depends on who you are, what you are you looking for and is important to you during your stay, and how much you are willing to spend.