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The identified quote comes in Act III scene 2, and is actually one of the parts of this play that adds humour to the unyielding bleakness and despair that threatens at times to dominate. Hamlet, in offering advice to the Players about how they should act and deliver lines, actually is used by Shakespeare as a humorous critique of bad acting in his time. In particular, the quote identified is an example of hyperbole, as Hamlet exaggerates how terrible bad acting is:
O it offends me to the soul, to hear a robustious periwig-pated fellow tear a passion to tatters, to very rags, to split the ears of the groundlings... it out-herods Herod.
Herod was of course the tyrant who ruled Palestine and ordered all babies in Bethlehem to be slaughtered because of the prophecy that was made about the birth of Jesus as the King of Kings. Thus to "out-herod Herod" is to literally out-do in wickedness or violence. The way in which Hamlet applies such a description to a bad actor who can't deliver his lines properly indicates the extent of the hyperbole.
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