What is the purpose of the collation selection in the installation screen?

The collation option determines the way ordering in the database is done. In languages that use special characters, for instance the German umlaut, the database collation determines the sorting order. If you don't know which collation you need, select the "utf8_general_ci" as most languages use this. The other collations listed are exceptions in regards to the general collation. If your language is not listed in the list of collations it most likely means that "utf8_general_ci is suitable.