The excess capacity problem associated with monopolistic competition implies that fewer firms could produce the same industry output at a lower total cost.

In monopolistic competition, firms have some market power and engage in non-price competition, leading to excess capacity, i.e., firms produce at a lower level of output than the one that would minimize their average total cost. This implies that fewer firms could produce the same industry output at a lower total cost, as they would not waste resources on product differentiation and advertising.