Smart Pricing will kick in if your vistors look but don't buy. The algo will build some historical data and then make an automated decision whether or not to lower your prices.

Also if the advertiser has a lot of volume and a high CTR rate that will also lower the price for that advertiser.

There will be ups and downs. The trick is to have more ups and less downs..

How does Google know if a visitor just browses the site rather than making a purchase? Is there some extra code that keeps track of it?

Smartpricing is in the main a set of assumptions based on other assumptions, and if you are a big enough advertiser to scream and shout effectively you will get a discount, but not anywhere near what the publisher has been deducted. Google keeps the profit. Google don't know if a click converts in the vast majority of cases - they guess.