A closed domain system is designed to understand specific types of conversations, such as sales chatbots, and has limited responses based on the business problem at hand. In contrast, an open domain system can understand any conversation in any domain and requires more complex models to adapt to different topics and respond relevantly. Open domain systems are better suited for human-to-human or human-to-machine conversations with unlimited scope, such as brainstorming meetings or customer support, where context and nuance are crucial. Closed domain systems, on the other hand, are ideal for limited-scope conversations like customer care calls with fixed questions. The choice between open and closed domain systems depends on factors like time-to-market, generalization, and scalability, and can be influenced by outsourcing or building the system in-house.