The primary difference is that in an arbitration, a third party, often referred to as a neutral, makes a decision. In a mediator, there is also a third party neutral, but this person is known as a facilitator whose main purpose is to assist the parties in resolving there issues between themselves. In essence, a mediator serves as a communicator of information who can present facts and ideas in a neutral way as a mediator is indeed neutral and should not have any biases whatsoever.
If you have been offered to elect to go to mediation or arbitration, most of the time you have the opportunity to do both. You should do a mediation first. A mediation is the first step because you have an opportunity to resolve your dispute in a way that makes sense for all involved. If a mediation is unsuccessful, you may want to elect to go to an arbitration. There are two type of arbitrations: Binding, and none binding. Unless you desire to waive your right to a Jury trial or access to the Courts, you may not want to choose a binding arbitration. A none binding arbitration can often help the parties resolve their dispute because they are seeing first hand how a neutral person determines the outcome of the case.