Damage scaling refers to the modified performance of weapons and armors in PvP when compared to PvE.
"Damage scaling" is a misnomer: the mechanic applies to both weapon power and armor HP.
When compared to PvE, weaker weapons of the same class are made proportionally stronger while stronger weapons are made proportionally weaker. For example, the Customize screen lists the Cutter as having a base power of 210, while the Passer has a base power of 700. When tested in PvP under controlled conditions, 6 hits with the Cutter does more damage than 4 hits with the Passer.
Damage scaling between different weapon classes is more arbitrary. For example, the Passer and the M-27B1 both have a base damage of 700, but the M-27B1 inflicts less damage per hit than the Passer in PvP. Another example is the FR28a (70 base power) and the M-27B1, where the FR28a is easily doing more than 10% of the M-27B1's damage per hit in PvP.
Scaling only applies to the weapon's base damage: the multipliers from power bonuses, weapon bonuses etc are unaffected, and will multiply the weapon's scaled base damage accordingly. Also note that the scaling depends on the weapon's damage per projectile, not per volley. This explains why the full volley of the Black Stars (840 damage x 3 rockets) does more damage than one rocket from the RPG-31 (2625 damage in one rocket), because less scaling is applied to each of the three rockets as opposed to the one large RPG.
Calculations are not yet being made, however players can get a rough impression of how effective a weapon can be by referencing its damage statistics in the store.
Armor defenses are scaled according to the total amount of HP in the set up. Weaker armors are given proportionally higher defences, while high-HP armors are proportionally weaker. For example, a Cutter with a 30% power bonus kills aViper in 4 hits, while a Knight dies in 10 hits despite having more than 50 times the Viper's HP in PVE. An easier comparison would be the fact that one shot from an R700-AA with 8330 power cannot seckill a Thunder with 23,600 HP, while it takes two shots with the R700-AA to kill a Knight with over 70,000 HP.
HP recovery levels has also been scaled: recovery items have been shown to restore disproportionately large amounts of HP on high HP armors. For example, the Phoenix Armor recovers +60 HP per kill in PvE, but in PvP the recovery rate is nearly 1/4 the maximum health (approx. 13,750 HP.) For HP regeneration, regeneration-per-kill has been massively scaled up when compared to regeneration-per-second, although the latter also restores a larger percentage of HP when compared to PvE.
The damage scaling mechanic does not apply to PvE, power in PvE is represented by the damage statistics in the store.