Small business cakes are more expensive because they don't have the economies of scale.
Paul will be buying ingredients in bulk, making batches of cake mix in bulk, decorating a few cakes with the same batch of icing etc, so more time efficient than making up a mix for one cake, have delivery contracts that are less per parcel, supplementing more labour intensive products with those that are made with much less effort, etc etc.
Throughput will be much higher - both the small business and a larger scale one need a suitable kitchen, but the small business might do 100 cakes a year, whereas Paul might do 10000 in the same space, so disproportionately lower costs per cake to provide the facility.