Reece, first of all, thanks for a brilliant question.
Now let's get into it - two parted answer here. Intel's binning process is mostly about - as you said - making the chips that can handle the cache and clock speeds formed into the higher-end Core i7. The ones that don't handle the cache and are deformed, are pushed down the line and turned into a Core i5. The worst of which are turned into Core i3's.
Most Core i7's can handle huge overclocks, personally I have my Core i7 3770K sitting at 5GHz stable. But then you've got to bring in Hyper-Threading to the conversation, which I disable to give me slighter higher clock speeds, while using less voltage and giving more stability while running cooler. Hyper-Threading is great for those pushing core-intensive applications, but games? Nowhere near as much.
I think a 4.5GHz quad-core processor is all anyone would need for gaming, as CPU speed starts to decline in terms of how much performance improvement it will offer after the mid-4GHz mark. If you were running a 3- or 4-way GPU setup, with multi-monitor tech like Eyefinity or Surround Vision, then the CPU speed will help another bit - but not that much. It would be better to have voltages lower and have 4.5GHz than crank the voltages higher to achieve 5GHz.
Now, the second part - how does this help in games? Well, my Core i7 at 4GHz or 5GHz offers no visible change in frame rates or load times. These days, I have my CPU cranked up to 5GHz "because I can", not because it offers visible performance improvements. I just like to remove performance bottlenecks - so if it's capable of 5GHz, then it sits there. My old Core i7 860 used to sit at 4GHz and I see no difference between that first-gen chip and this third-gen chip with the extra 1000MHz.
But, the single-core performance (without HT) is better with a Core i7 overclocked than it would be with a Core i3. This all depends on how CPU-intensive the task is, as games only use up to four cores anyway. This will change next year when next-gen consoles arrive, which should hopefully sport more than four cores, which I'm predicting will have 6 cores with some HT-like technology.
The other benefit now is that Core i7's are not that much more than decent Core i5's... which makes the decision that much easier.