Economies of Scale

Imagine two mates both open pizza shops on the same street. One makes fifty pizzas a night. The other makes five hundred. They both buy cheese from the same supplier. The mate making five hundred pizzas calls the supplier and says I will buy ten times what the other guy buys, but I want a thirty percent discount. The supplier agrees because a guaranteed large order is worth more than a small uncertain one. The big shop just lowered its ingredient cost per pizza by a third. Same cheese. Same pizza. Lower cost. Multiply this advantage across every ingredient, every piece of equipment, every hour of labour, and the gap becomes impossible for the small shop to close. This is why big companies keep getting bigger. Amazon runs fulfilment centres so vast that its shipping cost per package is a fraction of what a small retailer pays. Walmart buys in such volume that suppliers restructure their entire operations to meet Walmart's price demands.