What is the "Loudness" option on a receiver actually doing?

My Marantz PM6003 also has this feature, from the document that came with it reads: "The LOUDNESS compensates for human hearing characteristics by boosting the bass and treble response at low volume levels to achieve a more pleasing tonal balance".

Hope this helps, Tom. 

To explain why there's a loudness button, you should understand the way human hearing perceives volume.  There are different SPL to perceived volume curves for different frequencies.  At low listening levels bass and treble aren't perceived as loudly as mids, so at low levels you get a mid heavy presentation.  At higher volumes bass and highs are perceived much louder relative to mids.  This means that changing the volume also changes the perceived frequency response.  This is partly why louder sounds better.

What the loudness button does is boost the lows and highs just like Mayzei says.  This will make the frequency response much more balanced at low levels.  When you turn the volume up, you'll want to turn the loudness button off otherwise you'll get a very low and high heavy sound when listening louder.

Human ears naturally pick up on the midrange, specifically the frequencies of the human voice, more than other frequencies.  It has been theorized that this has happened through evolution over millennia.  During our time as caveman (and before) we would more easily be able to hone in on members of our group/tribe in the presence of other animal noises.  The loudness feature compensates by increasing the high frequencies (treble) and low frequencies (bass) at lower volumes to provide a more appealing tonal balance (at least for some).