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Most people book ahead through agencies. However, many do take a chance and arrive in town hoping to find a place. Hotels do tend to be booked during the season as at the moment there are not enough beds for the vast tourist influx. You might be approached at you point of entry by someone recommending (in broken German, probably) his relative's flat for the night and at a very reasonable price. In most cases this is quite a good bet as the 15 USD or so that they will charge you represents about 3 or four days of their normal work income, so they want you to be happy. There are some very nice hostels where you will have a sort of small, simply furnished but clean, suite of two or three rooms where, basically, you look after yourself. Lastly, the hotels. These range from simple, country style places to the grandeur that one expects in any major capital, but expect some rather grand pricing as well.
Dave Kelvin