Actually John, you have it sdrawkcab
The transponder is a "chip" that is imbedded into the bottom of the seat.
Inside the passengers seat is what is referred to as an "antenna" which senses the presence of the seat, which through the miracle of electronics, tells the SRS control unit "Hey, child seat here, don't blow off the passengers side airbag in case of a deployment". MB's with this system (ACSR, automatic child seat recognition) have a small light which states "AIRBAG off". Some models such as the ML have it in the instrument cluster, some are on the right side of the center console near the shifter. Remember this is ONLY the passenger airbag, not the steering wheel bag or any of the side "door" bags.
The transponder works similarly to how the newer DAS keys work. With that system, the chip is in the key, and the collar around the ignition switch is an antenna which senses the transponder is there, then determines if it's the correct transponder for the car and will allow a start to take place.