Final answer:
Excess capacity affects the rivalry among existing competitors, leading to price competition and potentially aggressive marketing strategies. This increased competition can drive down profitability in the industry.
Step-by-step explanation:
When incumbent firms have more capacity than they need to satisfy demand, they are directly affecting the market power they possess and which of the five forces is most impaired. This scenario most directly affects rivalry among existing competitors. Increased capacity can lead to Price Competition as firms attempt to gain or maintain market share by reducing prices, which can then result in aggressive marketing strategies, further promotions, or the improvement of product differences to lure customers. The intensified rivalry can often lead to a price war, reducing the overall profitability of the industry. A firm's market power is influenced by how many sellers are in the market, the similarity of each firm's products, the entry barriers for new firms, and the ways in which firms compete whether on price, advertising, or other product differentiators.