The player clearly makes the point that a play can be more convincing that real life when he relates the story of the time when he actually executed a man on stage. As he relates it, the man was sentenced to death so they made the punishment part of the play, but the man acted like a human being who was actually going to die and was therefore unconvincing because he started to cry and snivle and beg for his life--completely out of the character he was playing. Audiences accept the "reality" of the story they are watching because they give themselves over to the suspension of disbelief and commit themselves to the story. When the line is blurred, the audience doesn't know how to feel.
The point is proved when at the end of the play we see Guildenstern "kill" the player. We are initially SHOCKED! We are thinking--OH MY! But we absolutely believe he just died--it is part of the fiction written by the playwright. We are relieved when the Player stands up and shows the fake knife trick, but we are also feeling a bit tricked ourselves. In a couple of places in the play the characters claim that "death is just a failure to reappear." That is kind of a comfort to the audience and it is a part of the suspension of disbelief mentioned earlier. In our intellectual processes we know that fiction is just that, but in the experience of good fiction we buy into it!