You have asked a really fascinating question. Lots of people overlook the interesting choice of Shakespeare in including a tragedy as his play within a play, and it is really important to consider the parallels between this play and the action of the main play. Don´t overlook the importance of...
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this choice by the way the Mechanicals make a mockery of the tragedy!
For me, Pyramus and Thisbe is included because it offers a kind of alternate ending of the problem that we are presented with in Act I scene 1. Often, with Shakespeare´s plays, the line dividing comedy from tragedy can be quite thin, and his plays have elements of both. Act I scene 1 presents us with an opening that could be the start of a tragedy or a comedy in my opinion. Hermia is given a very stark choice - submit to her father´s will and marry Demetrius or face death. This parallels the situation between Pyramus and Thisbe (also echoing Romeo and Juliet), as both couples have a love that is not accepted by their parents or society at large. Both couples decide to run away to the forest to elope and marry in secret away from society, but of course, with Pyramus and Thisbe, this ends tragically, rather than the comic confusion with eventual happy ending that the main play presents us with. Whilst the main characters mock and poke fun at the Mechanicals for their over-the-top performance, the action they watch bears a somewhat disturbing resemblance to their initial problem.
What is the Pyramus and Thisbe story in A Midsummer Night's Dream?
The story of Pyramus and Thisbe is taken from Ovid's Metamorphoses, one of Shakespeare's resources for play plots. In fact, the plot of Romeo & Juliet is taken, in part, from Ovid's story. Shakespeare was quite fond of the trope of a play within a play, and so he takes what was a tragic story and makes it into a farce when performed by Bottom and his friends, who really are not supposed to be educated enough to understand the concept of high tragedy. Bottom, throughout the play, is shown misusing the English language in almost every one of his speeches, so he continues to do so in the Pyramus and Thisbe story. The idea of a talking wall, the wall that separates the lovers, makes the story even more ridiculous. Fortunately for the players, Theseus has just been married and is happy to give them the benefit of the doubt.
What links are there between "Pyramus and Thisbe" and A Midsummer Night's Dream in which it appears?
Good question. "Pyramus and Thisbe" is usually looked at by critics these days as a parody of "Romeo and Juliet", a play usually considered to be from around the same sort of period in Shakespeare's writing. It's possible that the two plays appeared "back to back" at the Globe, in repetoire.
And that, I think, is part of its job: locating a little tragedy of love (in which two lovers end up dead through mistaking...) within a comedy. It reminds us, of course, that even love in the comedies is painful and can lead to extreme emotions (you only have to think of Bottom-as-donkey sleeping with Titania, or the lovers' bloodthirsty fighting in Act 4!).
Love and death - "death" to the Elizabethans didn't just mean "the point at which you aren't alive", but also "orgasm" - were closely linked in the Elizabethan age, and Shakespeare (here, and in "Romeo and Juliet") is keen to juxtapose sex, death, and love.
On another note entirely, the other key point about the play-within-the-play is the theme of transformation. Bottom and Flute "become" Pyramus and Thisbe just as Bottom early became a donkey, just as Theseus and Hippolyta (in many productions, anyway) double up to "become" Oberon and Titania. Things change, and transform - love becomes hate, and hate love. Puck shifts shape into stools and mugs to trick the mortals. Everything changes.