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There is growing policy concern regarding the competitiveness of small-scale livestock production in the wake of the contemporary livestock revolution in many developing countries. In Kenya, this debate has focused on economies of scale and the undue influence of policy distortions on promoting the scaling up of dairy farms. This paper seeks to investigate economies of scale in Kenyan dairy in terms of relative profit efficiency at different levels of output, and identify policy and technology options to help small-scale farmers develop solutions to the challenges of competition. Data were collected from 204 dairy producers of different farm sizes in rural Kiambu and Thika, and urban Nairobi districts and a stochastic frontier model approach was used to analyze the determinants of profitability and inefficiency. Unit profitability per farm ranged between US$0.13 - US$0.16 per liter of milk with no significant variation across scales of farm. However, at all given levels of scale of farm, inefficiency significantly contributed to variability in profitability across farms. Scale had no significant effect on efficiency, confirming the relative competitiveness of small-scale dairy producers. Dairy farmers with commercial poultry achieved higher relative profit efficiency as poultry waste was fed to cattle. Rural location relative to Nairobi also increased efficiency. Linking rural areas and major market centre with good roads, strengthening of farmers' co-operative societies and exploring use of cheaper raw materials in the manufacture of concentrate feeds may strengthen the competitive position small dairy farms versus large ones.