von Trier was applying "The Distancing Effect," which was coined by Bertolt Brecht (who called it Verfremdungseffekt because he was German). It's a way to distance the audience from characters in a film (or for Brecht, a play). When an audience watches a performance, they picture themselves in the film. They connect with the characters and sympathize. With the Distancing Effect, we as an audience don't connect, and therefore are more inclined to analyze the actions of the characters from an intellectual standpoint.
So, the way the effect is achieved is by constantly reminding the audience "you are watching a movie. This is fake." There are certain ways to do this. Brecht used to create elaborate, nonfunctional, sometimes physically impossible sets (doors coming out of sides of houses, etc) to jar the audience. He also was one of the first notable playwrights to have characters (narrators and chorus notwithstanding) "break the fourth wall." Characters would even randomly break in to song and dance from time to time. One of my personal favorite tactics (which is evident in Paul Bettany's performance as Tom in Dogville) is actors would occasionally PURPOSELY give bad performances and break character. It's kind of brilliant once you know that's the goal.
So no, this is not supposed to be a play. It IS metaphorical for the citizens of Dogville, but it's also a reminder you're watching a movie. Did you notice all the continuity errors, bad handheld camera moves, and jump cuts? Those were also for the Distancing Effect.
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