It seems that whenever someone is one step closer to defining the truth, the real world shifts to the Otherworld. It appears most in dark places especially nightime.
Dark Shadows and their god appear in their most evil or scary form.
1. The Otherworld segments were all in York/Zach's mind, including the part with Emily. You see he was developing feelings for Emily, so in a reversed "knight in shining armor" role, York imagined her fighting through his darkest thoughts to save him. In reality, all she did was run up the clocktower and fight thomas. Emily never says anything about the Otherworld to anyone, so it's possible that she didn't experience it.
2. George and Kaysen's demon forms were just York's mind at work as well, he was giving the criminals he pursued a monsterous image to match their cruel and twisted intentions. One desired to be a god, one was just there to spread chaos and disorder.
3. The Red Seeds themselves seem to have some sort of slight pain nullifying effects; as can be seen with Diane and Carol, they don't really seem to be in pain. And lets not forget George, who ingested a huge amount of them and then only became vulnerable when shot at the weakest points on his body: his scar tissue.
4. The Red Seeds and the Purple Fog were part of a military test in the 1950's, and Kaysen is shown to be a soldier there at the time. Since he too was exposed to the fog directly, not to mention being involved in the project and seeming to love every moment of it, this motivates him to do what he can with the research and spread his chaos about the country. Hence the other murders involving the Red Seeds. The reason the townsfolk at the end finally snap for a while is because Kaysen let out more of the fog into the town beyond what comes up from the ground when it rains.
5. The White and Red Rooms were York/Zach's memories mixing with his thoughts of the case, as well as a few characters he saw coming ahead of time causing a sense of deja vu.
The basics of this theory is that there were no demons or Otherworld, it was just York/Zach's mind at work. It is evident that he has some severe suppressed issues and parts of the case while he was searching for evidence just drew them out. The only real world enemies in this game were George, Kaysen, and Thomas.
The game will not transition to the otherworld during the epilogue. Possibly signifying Zach moving past the deaths of his parents.