Ponyboy tells Cherry the story of Johnny's attack in chapter 2. Hinton uses a flashback to tell the story.
Johnny's attack is concrete evidence that the conflict between the Greasers and Socs is more than teenage posturing. It is more intense than a group of boys that push each other in the halls, give each other mean looks, say mean things to each other, and are just generally antagonistic to each other. The story indicates that real violence exists between the two groups. The story indicates that there is a deep seated hatred between the two groups. The story also indicates that at least one of the Greasers (Johnny) is looking for possible revenge. That revenge of his will not be mere fist fighting either. Johnny is prepared to take the life of anybody who corners him like that again.
The story about Johnny makes the conflict not just a fight for territory or respect, but a fight between life and death.