What exactly does it do? Pick up certain frequencies?
It’s an ear-flicker button. The ones that didn’t have them weren’t nearly as fun to annoy and humans didn’t keep them 
I think it’s more of a built in stretchy bit to prevent tearing when the cats ear snags on something than anything to do with sound.
Dogs have them too. I’ve always wondered about it.
Every twist/turn/notch in the cat and dog ear has a name. Names like antihelix, tragus, etc. At one point I knew all those terms. Then, the day after the exam. . .poof.
Function? Other than an anatomy professor’s dream? Ya got me. 
Is it a pleat? So cats can easily fold ears down in order to creep through underbrush, burrows, and underneath beds? And to better express extreme disdain for babytalk?
I always thought it was where they keep their M&Ms.
On the left side, it contains a little demon who whispers in the cat’s ears whenever there is a decision to be made. And on the right side…another demon.