Automatic Private IP Addressing (APIPA)

Automatic Private IP Addressing (APIPA) is a network client-side process used as a fallback position when DHCP services are not available on the network but the client devices are configured to use DHCP for their IP address configuration.

APIPA allows the client device to randomly choose one of the 65,534 addresses available in the Class B network address of 169.254.0.0/16. After choosing an address from this range, the computer sends an ARP request to see whether another device on the network is using that address, and if it is not, the client device uses the address.

Even though the device uses this made-up address, it continues to send out DHCP Discover broadcasts to locate a DHCP server on the network as soon as the DHCP server becomes available.

While waiting for a valid DHCP-delivered address, the device that is using an APIPA address can communicate with any other device on the network that is using an APIPA address.

If two or more devices are connected to a switch and the devices are using APIPA, therefore, all of them can communicate at least with each other, but not with any other devices on the network that are using proper addresses for that network segment.

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Source:http://www.dummies.com/how-to/content/automatic-private-ip-addressing-apipa.html