There are two things I know more about than you: marketplace dynamics(1a,1b) and game mechanics(2). I was planning on doing the marketplace one first, but there's a little blogging bubble about the pros and cons of game mechanics, so I might as well strike while the iron's hot.
Let's start off with some background reading. Wikipedia's entry on game mechanics is as good as any, and in particular for web startups, Yahoo!'s Reputation Patterns overview is a must-read.
Done? Good.
When most people talk about game mechanics in web applications, they generally are talking about one of two things: karma (which rewards quality engagement, see eBay, Kongregate, or Reddit) and virality (which comes from incentivizing user-to-user referrals, see FarmVille or any other Zynga game).
The stuff in Yahoo's Reputation Patterns are various methods of scoring and presenting karma; these things are neutral-to-good for users. Social proof has utility; the value of the utility differs from user-to-user. (Most people play Xbox 360 games for the fun of the games themselves; some, however, are achievement whores who will play numerous terrible games just to increase their Gamerscore.) These Reputation Patterns show the myriad ways that applications can reward and display good behavior - they're all just different methods of displaying social proof, what I call "the trappings of karma". The general objection to game mechanics is usually about these trappings, in that they obscure "more important" things - the main game/app itself or, extended out, real life. While I understand these objections, they aren't sufficiently convincing - these objections tend to come from situations where the game/app/experience itself is poorly designed, making the external mechanics more attractive on a relative basis. If you don't like achievements, points, and badges, you're free to ignore them.
The rewards for making referrals to others - as you see in Zynga games, most notably - are designed to benefit the game creator/website operator/the company/whatever more than the user herself. Any benefit to the user, while it may be large, is less than the benefit that accrues to the corporate entity sponsoring the game: i.e., Zynga designs their rewards precisely so that the company gets more benefit from a user referring a new user to a game than the user herself gets for the referral. As you can imagine, I'm a bit less enamored of these sorts of referral game mechanics than I am game mechanics that reward users directly. These sorts of referral incentives feel the same as AdWords arbitrage to me - they can be tremendously lucrative, but must be carefully managed and actively tweaked at all times; there's no "set it and forget it". Ideally, the product itself is so good that users start signing your praises - sneezing - without any formal incentive structure; examples of this are Dropbox, Google, and Mint.com. I'm more interested in making products better; at the very least, great products don't have to be monitored 24/7 and I enjoy my sleep. :)
Also note that the notion of rewarding virality is different than products that have increased utility as the number of people using them increases, notably social networks like Facebook and Twitter. (I leave out eBay here for reasons that I'll get to when I do the marketplace dynamics post. It's fallacy #1 and the fallacy makes me physically angry.)
The reason people get excited about game mechanics in web apps is that they're directly tied to two of the five things in Dave McClure's AARRR framework - retention (as a result of increased engagement spurred by the quest for karma) and referral (virality from incentives). Retention is great because it increases pageviews (which gets you more ad impressions if you're monetizing via advertising) and referral is great because it reduces your customer acquisition cost (remember, your LTV/CAC ratio needs to be greater than three or four to account for fixed costs. If you can reduce your CAC, you're on your way to making a dimes-into-dollars machine).
However, these are the easy things to do with game mechanics. I'm much more interested in game mechanics that make a product inherently better so that you have natural sneezers. Users who talk about and promote your product because the product is so damn good are the best kind of users to have; they're much more valuable than incentivized users, because you can only throw so many incentives at users before you've exhausted them.
So what are the game mechanics that make a product inherently better? How can you use game mechanics to get true sneezers?
The first example of game mechanics that make a product better are interactive tutorials that make it easier for users to understand and use your product. The most notable of these is Microsoft's Ribbon Hero. Ribbon Hero on-boards new users to Office 12, making them more productive within the Office Suite even after they have stopped playing the Ribbon Hero game. If users want, they can share and compare their scores with others, but that's not the key mechanic. The increased productivity is the end-goal and the immediate reward. Productive users of Office 12 are much more likely to be effective sneezers than users who are motivated by incentivized referrals from the game.
The second example of game mechanics that make a product better are those mechanics that increase an individual's utility as they add additional information to the site. This particularly works for applications that are built upon collections - applications like Delicious, Mint, and Google Reader have increased utility to the user as the user adds bookmarks, accounts, and RSS feeds, respectively. Game mechanics that reward users for engaging in these actions - actions that they should be doing anyway since they're already users of the app - benefit users directly without the need for the trappings of karma. (None of these applications, by the way, use game mechanics anywhere near as much as they should. In Delicious' case, in particular, it's a crying shame.)
At oneforty, I spend a lot of time thinking about how we can use game mechanics to have a better inherent experience for our users. Most new visitors to oneforty aren't even aware that there are such things as "Twitter tools" or "Twitter apps". These visitors might be familiar with a Twitter app on their iPhone or Blackberry, or maybe even a desktop client, but they're completely unaware of the hashtag monitoring tools, networking apps to find new people to follow, or entertainment sites that show off people's funny tweets (among 2,500 other Twitter tools and apps). Well-designed game mechanics that help educate and expose our users to the best Twitter applications and tools for what they don't even know that they're interested in is a true win-win for users and for the Company: they're mechanics that will create natural sneezers rather than incentivized referrals.
Please note that you can't just bolt on game mechanics onto an existing application or experience; if you do, you're much more likely to end up rewarding behavior that you don't want - you'll end up with users gaming the system to the detriment of other users. This is what happened with Digg's Leaderboard, for instance - they ended up having to kill it because a small subset of users were more motivated by their rank than by the rewards they received from natural interaction with the site, resulting in a "less good" experience for all other users of the site.
There are probably other ways that game mechanics can make web applications better that I haven't even considered - but retention, referral, education, and engagement should be more than enough to convince you that you need game mechanics in your app. If you're still not convinced of the utility of game mechanics for your web applications, go read the interviews that Josh Porter has done with Amy Jo Kim and Bryce Glass. If you want to leave money on the table, fine by me. Makes my job to beat you in the marketplace that much easier.
(1a) Especially if you study auction theory for a living. You think eBay proves you right about everything. You're wrong for many reasons. To start, see (1b).
(1b) For all values of "you" that are not Scot Wingo.
(2) For all values of "you" that are not Danc, Randy Farmer and Bryce Glass, Amy Jo Kim, Raph Koster, Jane McGonigal, Jesse Schell, or David Sirlin.