It's an expansion port, but there were no peripherals released that used it. If Sega had ever decided to release a "Master CD" CD-ROM add-on for the SMS, it would have used this port.
The Master System just treats it as another cartridge slot: if you look at the pinout, it's exactly the same as the main cart slot, but with a male edge connector instead of a female one. If you make a gender changer, you can connect standard SMS cartridges to it.
When you switch the SMS on, the BIOS checks each slot for the presence of a ROM. The slots are prioritised - it checks the card slot first, then the cart slot, then the expansion port. If it doesn't find a valid ROM in any of them, it runs the built-in game.
I personally found the expansion port useful when I was trying to dump Codemasters cartridges (for SMS Power). I wasn't able to dump them using the
SMSReader, so I made a gender changer to connect the Codemasters cart to the expansion port (
pic), then wrote a small program to transfer the ROM data from the expansion slot to a RAM cartridge in the cart slot. I could then dump the contents of this RAM cart on the SMSReader in the normal way.
Mike