Conversation is arguably the most important element of interaction with other characters in the game. To start a conversation, Scarlett just needs to walk close to another person and, when the "Talk to _____" contextual action prompt appears, press the action button. If a meaningful dialog is possible, a prompt with dialog choices appears, from which the player can select one. One example are Traders: When Scarlett first initiates a conversation, she has the option to let the trader explain the merchandise or services (example with Joanna shown to the right).
The "Talk to _____" contextual action prompt is available with almost all persons in the game, although most of them simply respond with "good day" or "greetings", in which case no meaningful conversation is possible.
Dialog options change, depending on the actions already taken. For example, once Joanna has explained her trade, the "About goods and skills" prompt is no longer shown -- but Scarlett now has a new entry in her Journal about the trader. In other conversations, Scarlett can ask for a favor, for example asking Hengfisk or a Gondolier to ferry her somewhere.
In some instances, a conversation does not lead to an immediate action. As shown in the two examples above, conversations are often used to express Scarlett's motivations. Most relevant in this context are the conversations with Death, usually after a Boss fight, and with Benedict, normally after Scarlett uses a Gateway Idol. Ultimately, those choices are part of what determines the story's ending.
Moreover, conversations allow Scarlett to accept non-mandatory Quests. In the example to the right, Scarlett has the option to help a minor character, Lea, find her mysteriously missing husband, or to "stay out of this". Accepting and then completing a quest (in this case, Where's the Man?) gives Scarlett additional Experience Points, and she usually gets a reward. To continue this example, after Scarlett finds out where the husband has gone, she can return to Lea and, in another conversation, either tell the truth, or lie about it in the hopes to keep the marriage intact. Most likely, her choice has an influence on Scarlett's morality, but it also determines the type of reward -- and boy do you feel sympathy with the husband when you look at the gift you get after lying to Lea...
Finally, a dialog is often offered before a major fight. In such a case, Scarlett can decide to just fight, or to first taunt her opponent. Presumably, this choice also has an influence on Scarlett's morality. In the example to the right, she can simply face whatever the Necromancer throws at her, or she can make a snarky remark before engaging in the fight:
Necromancer: But enough chit-chat. Now, you'll join one of this world's true overlords in battle.
Scarlett: Agreed. Let's see how well your puppets function without your master's strings.
Necromancer: How foolish of you to think you'd stand a chance against us!