How does concatenation of two string literals work?

It's defined by the ISO C standard, adjacent string literals are combined into a single one.

The language is a little dry (it is a standard after all) but section 6.4.5 String literals of C11 states:

In translation phase 6, the multibyte character sequences specified by any sequence of adjacent character and identically-prefixed wide string literal tokens are concatenated into a single multibyte character sequence.

This is also mentioned in 5.1.1.2 Translation phases, point 6 of the same standard, though a little more succinctly:

Adjacent string literal tokens are concatenated.

This basically means that "abc" "def" is no different to "abcdef".

It's often useful for making long strings while still having nice formatting, something like:

const char *myString = "This is a really long "
                       "string and I don't want "
                       "to make my lines in the "
                       "editor too long, because "
                       "I'm basically anal retentive :-)";

And to answer your unasked question, "What is this good for?"

For one thing, you can put constants in string literals. You can write

#define FIRST "John"
#define LAST "Doe"

const char* name = FIRST " " LAST;
const char* salutation = "Dear " FIRST ",";

and then if you'll need to change the name later, you'll only have to change it in one spot.
Things like that.