How do they decide where college bowl games are played?
It's another way for the BCS to make money. Venues basically bid on them a certain amount of time in advance, kind of like cities that bid on the Olympics. It usually ends up being warm weather places or domes, so that the elements don't intefere with the game. (i.e. the Georgia Dome, the Metrodome, Ford Field, Pro Players Stadium, etc.)
How are the bowl games and who plays in them determined?
Almost, if not all, of the bowls are created with conference tie-ins, meaning that two conferences are, unless circumstances arise, going to send a representative to that bowl. The circumstances can range from a conference not having enough teams bowl-eligible to put one in there to one of their teams playing in the national championship game and losing one of their other bids. But the matchups are determined by how each conference's standings are at the end of the year. For example, before the BCS madness was created, the Rose Bowl always had the Pac-10 champion vs the Big 10 champion. If you go to espn.com, they have a bowl schedule there that, if I remember correctly, has the tie-ins on the page. It might help you out.
I think there should be a playoff,b ut the bowls still mean a lot to players and coaches. For coaches of small programs, making a bowl can save their job. But I think they should raise the winning percentage necessary to reach a bowl so better teams make it, not just prestigious programs (FSU).