Let’s say the third party lists it for $35.50

Amazon applies a discount of $0.51 cents to bring it under the $35 amount for free shipping.

Someone buys it for/that $34.99 but Amazon still pays the original seller based on the seller’s original listed price.

And so Amazon subsidised it, but still came out net benefit because the amount of the subsidy was less than shipping cost, or less than the price of some other item the customer now had to put in their basket to get over the free shipping threshold again.