How does Android Market WebStore's Silent Install work?
On the other note, I also thought that
  C2DM might have been used to do this,
  but since my personal device uses 2.1
  and C2DM is available to devices
  having 2.2+, the possibility of use of
  C2DM is quite less.


It is actually quite plausible for 2.1 Market to use C2DM. GTalk, Gmail, and many other Google apps have always used C2DM internally (even before it's named C2DM). In 2.1, C2DM exist as GTalk Service. In 2.2, Google opened the C2DM API for external developers since they realized that 1) most app developers does not have the resources to create a reliable Push notification service, 2) a unified Push service would save battery, 3) Reliable instant Push service is a good selling point for Android.