Bazaar of Baghdad was designed as part of the Arabian Nights set, this was a very flavor driven set with many cards designed around characters from the 1001 Arabian Nights stories, and others from general Arabian history or legend.
Bazaar of Baghdad obviously follows in this flavor, and the mechanics of the card attempt to evoke a feeling of getting something you want, at a price. It was designed to give card selection: at the cost of 1 card (and obviously a one-time cost of one land drop), you could trade your 3 worst cards for 2 others. In a world of massively high-powered cards amongst dross, this would be a hugely important effect. For decks aiming to build up a combo of 2 or 3 cards, often all other cards in the deck can safely be discarded while searching for the remaining pieces.
This card was one of the first attempts at giving players a way to trade bad cards for better ones. Cards like Faithless Looting and Careful Study are more recently printed cards with a very similar tradeoff (3 cards in hand for 2 new cards) as a single use, both have seen use in legacy dredge lists, as well as some other archetypes (reanimator and other graveyard strategies).
I can't answer for how (if at all) it was used before Ravnica block, or what decks played it, or what happened with it in the years leading up to the printing of the dredge mechanic.