The flag is a standard email feature, although it doesn't get used that much. It is called "Flag for follow up" and is what it sounds like. It's just note to self indicator. You click it when you want to remind yourself that there is something about the message that you want to follow up on.
The person on the other end of the message doesn't get any kind of notification, and neither does eBay. Although if eBay are examining your messages, they can see the flags, but they have to go looking. This might be helpful if you are reporting something to them. A way to show them which messages to look at.
