It exists when marginal cost is less than average cost and it is still possible to decrease average (unit) cost by producing more goods and services. Excess capacity may be measured as the increase in the current level of output that is required to reduce unit costs of production to a minimum. Excess capacity is a characteristic of natural monopoly or monopolistic competition. It may arise because as demand increases, firms have to invest and expand capacity in lumpy or indivisible portions. Firms may also choose to maintain excess capacity as a part of a deliberate strategy to deter or prevent entry of new firms.