The process in which both parties submit their monetary proposals (in baseball, salary proposals) to a third party (arbitrator) who, after a hearing, makes a determination which proposal will be accepted. The arbitrator makes their decision based which offer is closest to the salaries of players with similar ability, performance record, and service time.
In baseball, a player is eligible for salary arbitration if they've had less than six years of service and A) without a contract for the next season and B) has been tendered a contract by his current team by the deadline and C) has been on a major league roster for at least 3 seasons or D) has been on a major league roster for 2 years but has accumulated service time that has placed him in the top 22 percent in this class of players.
In 2013, for the first time since 1974, no Major League Baseball player had an arbitration case hearing this year. Meaning, every player eligible agreed to a contract with their team or was allowed to become a free agent.