"Free shipping" means that the cost of shipping is actually included in the product price.

Yes and no. Take, for example, online shipping. I know, I know...but I used to work retail at Barnes and Noble, so just bare with me here. So, people used to complain about the fact that not only were prices online cheaper, but then they couldn't figure out why the shipping was free, too. Obviously we were screwing people over in the store. Well, at least when it comes to stores who are only online (and big chain stores like BN, who actually have huge warehouses where most of their product is kept), it is cheaper for them to lower the cost of the item plus give you free shipping than it is for them to maintain a "brick and mortar" store (rent/lease, people to staff it, fixtures, utilities, etc). So, basically, they are passing the savings on to you--while still making a profit.

Does that mean that they are increasing the base cost to include shipping? Maybe..but I don't think its likely.

I agree with you, Jaime, because I think it supports my claim. You’re saying that "they are passing the savings on to you": shipping cost is included in the price, just like rent etc. is included when you buy it at a brick and mortar store.

They’re not saving shipping cost, they’re saving rent/lease...

A.

If that were true, the "free shipping" vendor would charge more for the same product than another vendor that charges for shipping.

They would charge more for the product than another vendor charges for shipping? Expand please.

If the cost of shipping were included in the product price, then vendor A would sell it for $200 + $10 shipping, and vendor B would sell it for $210 with free shipping.

In reality, they both sell it for $200.

How do you know? Is there a study out there that shows that products with free shipping are generally near in price to similar products?

Just personal experience buying things online. Many vendors sell the same thing for the same price. Some have free shipping, some don't.