The scale effect refers to the effect that the average cost of products decreases continuously with the increase of output. Because of the relative geographical concentration, the mutual influence of technology and the spread of cost-saving methods, the related enterprises form the external economies of scale. The production cost, information cost and management cost of its products decrease with the increase of output, which enhances the competitiveness of its products. The scale advantage of the enterprise group also constitutes its cost advantage.
The scale effect is Walmart's direct sourcing model which eliminates unnecessary middlemen and significantly reduces product costs.