Flow velocity is important in exhaust pipe design. Exhaust gases are emitted in pulses. One pulse every exhaust stroke. Small pipes yield a high flow velocity. High flow velocity increases inertia of the flowing gas and smooths out the stop / start nature of gas pushed out by the engine. As the gas continues to flow between exhaust strokes, it creates a low pressure at the exhaust manifold which helps to suck out exhaust gases on the next exhaust stroke. This reduces the energy required to clear the cylinder of exhaust and re-accelerate the gas residing in the exhaust pipe already, thus reducing the energy wasted pushing out exhaust and improving the efficiency of the engine. Further, smaller exhaust pipes means the mass of gas held within is less. This translates to less energy required accelerating the mass of gas in the exhaust pipe with each exhaust stroke. Again engine efficiency is improved.
Smaller exhaust pipes present a greater resistance to steady state flow. So smaller isn’t necessarily better either. It’s a compromise between resistance to flow, flow velocity and mass of gas residing in the pipe. There is a sweet spot. An optimal compromise. The manufacturer’s design is based on this optimum. A bigger exhaust pipe isn’t necessarily better. Even without any understanding of exhaust physics, the proof is that manufacturers do not exploit bigger exhausts to improve performance. Why else wouldn’t they? Imagine how much extra metal is involved in a slightly bigger pipe. Not much, and steel is cheap. Manufactures don’t increase exhaust size because it doesn’t universally improve performance or efficiency.
The optimal exhaust size is a function of exhaust volume. The greater the exhaust volume, the greater the optimal exhaust size. Exhaust volume increases with engine rpm and fuel delivery. So ideally you’d have a variable sized exhaust pipe that increases in size as rpm and fuel injection quantity increases. For a fixed exhaust pipe size then you need to pick a compromise. The manufacturer does this – they will pick an exhaust size that is somewhere in the middle, optimized for the rpm when the engine develops it’s maximum torque and optimised to deliver the greatest area under the power curve. This will provide the greatest possible torque whilst maximising average power over the entire power curve. Maximum torque and low rpm performance are favoured because this is what makes the biggest impact for normal day to day driving.
A larger exhaust changes the shape of the power curve. It makes it more peaky, but the area under the curve is reduced. Average power is less but peak power is more. This will present as an extra couple of kW of peak power on a dyno run as it provides lower resistance at peak exhaust volume. However, looking at the entire rev range, the larger exhaust has deviated from the optimal size and average power over the full rpm range will be reduced. Maximum torque may be less and low rpm will produce less power. Fuel efficiency will also be worse, since most of the time your engine operates in the bottom half of its rev range.