According to Merriam-Webster Online, the answer is simple: usage.
To decide which words to include in the dictionary and to determine what they mean, Merriam-Webster editors study the language as it's used. They carefully monitor which words people use most often and how they use them.
The following is a condensed version.
The editors scour a cross section of published material in search of new words, new usages of existing words, variant spellings, and inflected forms – in short, anything that might help in deciding if a word belongs in the dictionary. Any word of interest is marked.
The marked passages are then input into a computer system and stored both in machine-readable form and on 3" x 5" slips of paper to create citations.
Merriam-Webster's citation files, which were begun in the 1880s, now contain 15.7 million examples of words used in context and cover all aspects of the English vocabulary. Citations are also available to editors in a searchable text database (linguists call it a corpus) that includes more than 70 million words drawn from a great variety of sources.
Editors review groups of citations. It is the definer's job to determine which existing entries can remain essentially unchanged, which entries need to be revised, which entries can be dropped, and which new entries should be added. In each case, the definer decides on the best course of action by reading through the citations and using the evidence in them to adjust entries or create new ones.
Before a new word can be added to the dictionary, it must have enough citations to show that it is widely used. A word may be rejected if all of its citations come from a single source or if they are all from highly specialized publications that reflect the jargon of experts within a single field. Specifically, the word must have enough citations to allow accurate judgments about its establishment, currency, and meaning.
In rare cases, a word jumps onto the scene and is both instantly prevalent and likely to last, as was the case in the 1980s with AIDS.
The size and type of dictionary also affects how many citations a word needs to gain admission. Because an abridged dictionary, such as Merriam-Webster's Collegiate® Dictionary, has fairly limited space, only the most commonly used words can be entered; to get into that type of dictionary, a word must be supported by a significant number of citations. But a large unabridged dictionary, such as Webster's Third New International Dictionary, has room for many more words, so terms with fewer citations can still be included.