What is the significance of the "play within the play" in A Midsummer Night's Dream?

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The basic reason for the play within the play (and Bottom and his crew generally) is that Shakespeare always had to write scenes that could be played by his company's clowns, some of whose names have come down to us today. The "groundlings" (people standing in front of the stage who paid very low entrance fees but who came to all the plays if there were parts that would entertain them) demanded to see actors like Will Kemp do their comic stuff.

Fortunately for us, Shakespeare was a genius, and the play within the play, Pyramus and Thisbe, is immortally hilarious. Undoubtedly it made the Queen and her retainers laugh just as much as the groundlings.

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