418 U.S. 602 (1974)

UNITED STATES
v.
MARINE BANCORPORATION, INC., ET AL.

No. 73-38.

Supreme Court of United States.

Argued April 23, 1974. Decided June 26, 1974. APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF WASHINGTON.

*604 Deputy Solicitor General Friedman argued the cause for the United States. With him on the brief were Solicitor General Bork, Assistant Attorney General Kauper, Howard E. Shapiro, and George Edelstein.

R. A. Moen argued the cause for appellees Marine Bancorporation, Inc., et al. With him on the brief was James Wm. Johnston. Lee Loevinger argued the cause for appellee Comptroller of the Currency. With him on the brief were Robert Bloom and Jon D. Hartman.

*605 MR. JUSTICE POWELL delivered the opinion of the Court.

The United States brought this civil antitrust action under ง 7 of the Clayton Act, 38 Stat. 731, as amended, 15 U. S. C. ง 18, to challenge a proposed merger between two commercial banks. The acquiring bank is a large, nationally chartered bank based in Seattle, Washington, and the acquired bank is a medium-size, state-chartered bank located at the opposite end of the State in Spokane. The banks are not direct competitors to any significant degree in Spokane or any other part of the State. They have no banking offices in each other's home cities. The merger agreement would substitute the acquiring bank for the acquired bank in Spokane and would permit the former for the first time to operate as a direct participant in the Spokane market.

The proposed merger would have no effect on the number of banks in Spokane. The United States bases its case exclusively on the potential-competition doctrine under ง 7 of the Clayton Act. It contends that if the merger is prohibited, the acquiring bank would find an alternative and more competitive means for entering the Spokane area and that the acquired bank would ultimately develop by internal expansion or mergers with smaller banks into an actual competitor of the acquiring bank and other large banks in sections of the State outside Spokane. The Government further submits that the merger would terminate the alleged procompetitive influence that the acquiring bank presently exerts over Spokane banks due to the potential for its entry into that market.

After a full trial, the District Court held against the Government on all aspects of the case. We affirm that court's judgment. We hold that in applying the potential-competition *606 doctrine to commercial banking, courts must take into account the extensive federal and state regulation of banks, particularly the legal restraints on entry unique to this line of commerce. The legal barriers to entry in the instant case, notably state-law prohibitions against de novo branching, against branching from a branch office, and against multibank holding companies, compel us to conclude that the challenged merger is not in violation of ง 7.

I

BACKGROUND

A. Facts.

The acquiring bank, National Bank of Commerce (NBC), is a national banking association with its principal office in Seattle, Washington. Located in the northwest corner of the State, Seattle is the largest city in Washington. NBC is a wholly owned subsidiary of a registered bank holding company, Marine Bancorporation, Inc. (Marine), and in terms of assets, deposits, and loans is the second largest banking organization with headquarters in the State of Washington. At the end of 1971, NBC had total assets of $1.8 billion, total deposits of $1.6 billion, and total loans of $881.3 million.^[1] It operates 107 branch banking offices within the State, 59 of which are located in the Seattle metropolitan area and 31 of which are in lesser developed sections of eastern Washington. In order of population, the four major *607 metropolitan areas in Washington are Seattle, Tacoma, Spokane, and Everett. NBC has no branch offices in the latter three areas.

The target bank, Washington Trust Bank (WTB), founded in 1902, is a state bank with headquarters in Spokane. Spokane is located in the extreme eastern part of the State, approximately 280 road miles from Seattle. It is the largest city in eastern Washington, with a population of 170,000 within the corporate limits and of approximately 200,000 in the overall metropolitan area. The city has a substantial commercial and industrial base. The surrounding region is sparsely populated and is devoted largely to agriculture, mining, and timber. Spokane serves as a trade center for this region. NBC, the acquiring bank, has had a longstanding interest in securing entry into Spokane.

WTB has seven branch offices, six in the city of Spokane and one in Opportunity, a Spokane suburb. WTB is the eighth largest banking organization with headquarters in Washington and the ninth largest banking organization in the State. At the end of 1971, it had assets of $112 million, total deposits of $95.6 million, and loans of $57.6 million. It controls 17.4% of the 46 commercial banking offices in the Spokane metropolitan area. It is one of 12 middle-size banks in Washington (i. e., banks with assets in the $30 million to $250 million range).

WTB is well managed and profitable. From December 31, 1966, to June 30, 1972, it increased its percentage of total deposits held by banking organizations in the Spokane metropolitan area from 16.6% to 18.6%. The amount of its total deposits grew by approximately 50% during that period, a somewhat higher rate of increase than exhibited by all banking organizations operating in Spokane at the same time.^[2] Although WTB has exhibited *608 a pattern of moderate growth, at no time during its 70-year history has it expanded outside the Spokane metropolitan area.

As of June 30, 1972, there were 91 national and state banking organizations in Washington. The five largest in the State held 74.3% of the State's total commercial *609 bank deposits and operated 61.3% of its banking offices. At that time, the two largest in the State, Seattle-First National Bank and NBC, held 51.3% of total deposits and operated 36.5% of the banking offices in Washington.^[3] There are six banking organizations operating in the Spokane metropolitan area. One organization, Washington Bancshares, Inc., controls two separate banks and their respective branch offices. As of midyear 1972, this organization in the aggregate held 42.1% of total deposits in the area. Seattle-First National Bank, by comparison, held 31.6%. The target bank held 18.6% of total deposits at that time, placing it third in the Spokane area behind Washington Bancshares, Inc., and Seattle-First National Bank. Thus, taken together, Washington Bancshares, Seattle-First National Bank, and WTB hold approximately 92% of total deposits in the Spokane area. None of the remaining three commercial banks in Spokane holds a market share larger than 3.1%.^[4] One of these banks, Farmers & Merchants Bank, has offices only in a Spokane suburb.

The degree of concentration of the commercial banking business in Spokane may well reflect the severity of Washington's statutory restraints on de novo geographic expansion by banks. Although Washington permits branching, the restrictions placed on that method of internal *610 growth are stringent. Subject to the approval of the state supervisor of banking, Washington banks with sufficient paid-in capital may open branches in the city or town in which their headquarters are located, the unincorporated areas of the county in which their headquarters are located, and incorporated communities which have no banking office. Wash. Rev. Code Ann. ง 30.40.-020 (Supp. 1973). But under state law, no state-chartered bank "shall establish or operate any branch . . . in any city or town outside the city or town in which its principal place of business is located in which any bank, trust company or national banking association regularly transacts a banking or trust business, except by taking over or acquiring an existing bank, trust company or national banking association . . . ." Ibid. Since federal law subjects nationally chartered banks to the branching limitations imposed on their state counterparts,^[5] national and state banks in Washington are restricted to mergers or acquisitions in order to expand into cities and towns with pre-existing banking organizations.

The ability to acquire existing banks is also limited by a provision of state law requiring that banks incorporating in Washington include in their articles of incorporation a clause forbidding a new bank from merging with or permitting its assets to be acquired by another bank for a period of at least 10 years, without the consent of the state supervisor of banking. Wash. Rev. Code Ann. ง 30.08.020 (7) (1961 and Supp. 1973).^[6] In addition, *611 once a bank acquires or takes over one of the banks operating in a city or town other than the acquiring bank's principal place of business, it cannot branch from the acquired bank. Wash. Rev. Code Ann. ง 30.40.020 (Supp. 1973). Thus, an acquiring bank that enters a new city or town containing banks other than the acquired bank is restricted to the number of bank offices obtained at the time of the acquisition. Moreover, multibank holding companies are prohibited in Washington. Wash. Rev. Code Ann. ง 30.04.230 (Supp. 1973).^[7] Under state law, no *612 corporation in Washington may own, hold, or control more than 25% of the capital stock of more than one bank. Ibid. Violations of the one-bank holding company statute are gross misdemeanors carrying a possible penalty of forfeiture of a corporate charter. Ibid. Accordingly, it is not possible in Washington to achieve the rough equivalent of free branching by aggregating a number of unit banks under a bank holding company.^[8]

B. The Proceedings.

In February 1971, Marine, NBC, and WTB agreed to merge the latter into NBC. NBC, as the surviving bank, would operate all eight banking offices of WTB as branches of NBC. In March 1971, NBC and WTB applied to the Comptroller of the Currency pursuant to the *613 Bank Merger Act of 1966 for approval of the merger.^[9] As required by that Act, see 12 U. S. C. ง 1828 (c) (4), the Comptroller requested "reports on the competitive factors involved" from the Attorney General, the Federal Deposit Insurance Corporation, and the Board of Governors of the Federal Reserve System. Each of these agencies submitted a negative report on the competitive effects of the merger. The Attorney General relied on the reasons advanced in the instant case. The latter two agencies based their conclusions primarily on the degree of concentration in commercial banking in Washington as a whole.

The Comptroller approved the merger in a report issued September 24, 1971. He concluded that state law precluded NBC from branching in Spokane and "effectively prevented" NBC from causing a new Spokane bank to be formed which could later be treated as a merger partner. He noted that state law prevented the only independent small bank with offices located within the city boundaries of Spokane from merging with NBC, since that bank was state chartered, had been founded in 1965, and was subject to the minimum 10-year restriction against sale of a new bank set out in Wash. Rev. Code *614 Ann. ง 30.08.020 (7) (1961 and Supp. 1973). The Comptroller relied heavily on the view that the merger would contribute to the convenience and needs of bank customers in Spokane by bringing to them services not previously provided by WTB.

Acting within the 30-day limitation period set out in the Bank Merger Act of 1966, 12 U. S. C. ง 1828 (c) (7), the United States then commenced this action in the United States District Court for the Western District of Washington, challenging the legality of the merger under ง 7 of the Clayton Act.^[10] As a result, the merger was automatically stayed. 12 U. S. C. ง 1828 (c) (7) (A). Pursuant to 12 U. S. C. ง 1828 (c) (7) (D), the Comptroller intervened in support of the merger as a party defendant.

Prior to trial the United States dropped all allegations concerning actual competition between the merger partners.^[11] The remainder of the complaint addressed the subject of potential competition. The United States *615 sought to establish that the merger "may . . . substantially. . . lessen competition" within the meaning of ง 7 in three ways: by eliminating the prospect that NBC, absent acquisition of the market share represented by WTB, would enter Spokane de novo or through acquisition of a smaller bank and thus would assist in deconcentrating that market over the long run; by ending present procompetitive effects allegedly produced in Spokane by NBC's perceived presence on the fringe of the Spokane market; and by terminating the alleged probability that WTB as an independent entity would develop through internal growth or through mergers with other medium-size banks into a regional or ultimately statewide counterweight to the market power of the State's largest banks. The Government's first theoryโ€”alleged likelihood of de novo or foothold entry by NBC if the challenged merger were blockedโ€”was the primary basis upon which this case was presented to the District Court.^[12]

At the close of final oral argument following a week-long trial, the District Judge ruled for the defendants from the bench. Two weeks later he adopted without change the defendants' proposed findings of facts and conclusions of law, the latter consisting of seven sentences. 1973-1 Trade Cas. ถ 74,496, p. 94,244 (1973).^[13]*616 The court found that the merger would "substantially" increase competition in commercial banking in the Spokane metropolitan area and would have "no inherent anticompetitive effect . . . ." Ibid. In light of the legal and economic barriers to any other method of entry, the court further found "no reasonable probability" that, absent the challenged merger, NBC would enter the Spokane market in the "reasonably foreseeable future." Id., at 94,245.

According to the District Court, Washington law forbade NBC from establishing de novo branches in Spokane, and the Government had failed to establish that there was any existing bank in Spokane other than WTB "available for acquisition by NBC on any reasonably acceptable basis at any time in the foreseeable future, or at all." Ibid. Moreover, any attempt by NBC to enter de novo by assisting in the formation of and then acquiring a newly chartered bank in Spokane "even if it could be legally accomplished,"^[14] or to undertake a foothold *617 acquisition, would not be economically feasible. Ibid. In addition to noting the past and projected slow growth of the Spokane area, the court found that the ability to branch in a metropolitan area was essential to effective competition in the banking business. Ibid. Under state law, NBC would be unable to open new branch offices in Spokane if it made a foothold acquisition or helped form and then acquired a new bank. These and other factors rendered "negative" the prospects for growth of a foothold acquisition or of a sponsored bank started from scratch. Ibid. This was confirmed by the experience of another large banking organization not based in Spokane that had entered the city through a foothold acquisition in 1964 and subsequently had been unable to expand the market share of the acquired bank. Id., at 94, 245-94,246.

The court found no perceptible procompetitive effect deriving from NBC's premerger presence on the fringe of the Spokane market. Id., at 94,246. It also held that the Government had failed to carry its burden of proving a reasonable probability that WTB, absent the merger, would expand beyond the Spokane market by de novo growth or through combination with another medium-size bank. Ibid. It found no probability that NBC would be "entrenched as a dominant bank in the *618 Spokane metropolitan area" as a result of the merger, and it could find no likelihood that the merger would trigger a series of defensive mergers by other banks in the State. Id., at 94,246-94,247.^[15]

On the basis of its findings, the District Court dismissed the Government's complaint. The Government thereupon brought this direct appeal under the Expediting Act, 32 Stat. 823, as amended, 15 U. S. C. ง 29. We noted probable jurisdiction. 414 U. S. 907 (1973).

II

THE RELEVANT MARKETS

Determination of the relevant product and geographic markets is "a necessary predicate" to deciding whether a merger contravenes the Clayton Act. United States v. Du Pont & Co., 353 U. S. 586, 593 (1957); Brown Shoe Co. v. United States, 370 U. S. 294, 324 (1962). The District Court found that the relevant product market "within which the competitive effect of the merger is to be judged" is the "business of commercial banking (and the cluster of products and services denoted thereby). . . ." 1973-1 Trade Cas. ถ 74,496, p. 94,243. The parties do *619 not dispute this finding, and in any event it is in full accord with our precedents.^[16]

The District Court found that the relevant geographic market is the Spokane metropolitan area, "consisting of the City of Spokane and the populated areas immediately adjacent thereto, including the area extending easterly through the suburb of Opportunity toward the Idaho border . . . ." Id., at 94,244. This area extends approximately five miles to the west and south and 10 miles to the north and east of the center of the city. It is wholly within and considerably smaller than Spokane County and is surrounded by a sparsely populated region, with no nearby major metropolitan centers. It contains all eight of the target bank's offices. On the basis of the record, we have no reason to doubt that it constitutes a reasonable approximation of the "localized" banking market in which Spokane banks offer the major part of their services and to which local consumers can practicably turn for alternatives. E. g., United States v. Phillipsburg National Bank, 399 U. S. 350, 362-365 (1970). It is also the area where "the effect of the merger on competition will be direct and immediate . . . ," which as this Court has held is the appropriate "section of the country" for purposes of ง 7. United States v. Philadelphia National Bank, 374 U. S. 321, 357 (1963). Accordingly, we affirm the District Court's holding that the Spokane metropolitan area is the appropriate geographic market for determining the legality of the merger.

Prior to trial the Government stipulated that the Spokane area is a relevant geographic market in the instant *620 case, and there is no dispute that it is the only banking market in which WTB is a significant participant. Nevertheless, the Government contends that the entire State is also an appropriate "section of the country" in this case. It is conceded that the State is not a banking market. But the Government asserts that the State is an economically differentiated region, because its boundaries delineate an area within which Washington banks are insulated from most forms of competition by out-of-state banking organizations. The Government further argues that this merger, and others it allegedly will trigger, may lead eventually to the domination of all banking in the State by a few large banks, facing each other in a network of local, oligopolistic banking markets. This assumed eventual statewide linkage of local markets, it is argued, will enhance statewide the possibility of parallel, standardized, anticompetitive behavior. This concern for the possible statewide consequences of geographic market extension mergers by commercial banks appears to be an important reason for the Government's recent efforts to block such mergers through an application of the potential-competition doctrine under ง 7.^[17]

The Government's proposed reading of the "any section of the country" phrase of ง 7 is at variance with this Court's ง 7 cases, and we reject it. Without exception the Court has treated "section of the country" and "relevant geographic market" as identical,^[18] and it has defined *621 the latter concept as the area in which the goods or services at issue are marketed to a significant degree by the acquired firm. E. g., Philadelphia National Bank, supra, at 357-362.^[19] In cases in which the acquired firm markets its products or services on a local, regional, and national basis, the Court has acknowledged the existence of more than one relevant geographic market.^[20] But in no previous ง 7 case has the Court determined the legality of a merger by measuring its effects on areas where the acquired firm is not a direct competitor. In *622 urging that the legality of this merger be gauged on a statewide basis, the Government is suggesting that we take precisely that step, because, as it concedes, the section of the country in which WTB markets by far the greatest portion of its services, due to the predominantly localized character of commercial banking, is the Spokane metropolitan area.^[21] Under the precedents, we decline the Government's invitation. We hold that in a potential-competition case like this one, the relevant geographic market or appropriate section of the country is the area in which the acquired firm is an actual, direct competitor.

Apart from the fact that the Government's statewide approach is not supported by the precedents, it is simply too speculative on this record. There has been no persuasive showing that the effect of the merger on a statewide basis "may be substantially to lessen competition" within the meaning of ง 7. To be sure, ง 7 was designed to arrest mergers "at a time when the trend to a lessening of competition in a line of commerce [is] still in its incipiency." Brown Shoe Co., 370 U. S., at 317. See, e. g., United States v. Von's Grocery Co., 384 U. S. 270, 277 (1966). Moreover, the proscription expressed in ง 7 against mergers "when a `tendency' toward monopoly or [a] `reasonable likelihood' of a substantial lessening of competition in the relevant market is shown," United States v. Penn-Olin Chemical Co., 378 U. S. 158, 171 (1964), applies alike to actual-and potential-competition cases. Ibid. But it is to be remembered that ง 7 deals *623 in "probabilities," not "ephemeral possibilities." Brown Shoe Co., supra, at 323.^[22] The Government's underlying concern for a linkage or network of statewide oligopolistic banking markets is, on this record at least, considerably closer to "ephemeral possibilities" than to "probabilities." To assume, on the basis of essentially no evidence, that the challenged merger will tend to produce a statewide linkage of oligopolies is to espouse a per se rule against geographic market extension mergers like the one at issue here. No ง 7 case from this Court has gone that far,^[23] and we do not do so today. For the purpose of this case, the appropriate "section of the country" and the "relevant geographic market" are the sameโ€”the Spokane metropolitan area.

III

POTENTIAL-COMPETITION DOCTRINE

The term "potential competitor" appeared for the first time in a ง 7 opinion of this Court in United States v. El Paso Natural Gas Co., 376 U. S. 651, 659 (1964). El Paso was in reality, however, an actual-competition rather than a potential-competition case.^[24] The potential-competition *624 doctrine has been defined in major part by subsequent cases, particularly United States v. Falstaff Brewing Corp., 410 U. S. 526 (1973).^[25] Unequivocal proof that an acquiring firm actually would have entered de novo but for a merger is rarely available.^[26] Thus, as Falstaff indicates, the principal focus of the doctrine is on the likely effects of the premerger position of the acquiring firm on the fringe of the target market. In developing and applying the doctrine, the Court has recognized that a market extension merger may be unlawful if the target market is substantially concentrated, if the acquiring firm has the characteristics, capabilities, and economic incentive to render it a perceived potential *625 de novo entrant, and if the acquiring firm's premerger presence on the fringe of the target market in fact tempered oligopolistic behavior on the part of existing participants in that market. In other words, the Court has interpreted ง 7 as encompassing what is commonly known as the "wings effect"โ€”the probability that the acquiring firm prompted premerger procompetitive effects within the target market by being perceived by the existing firms in that market as likely to enter de novo. Falstaff, supra, at 531-537.^[27] The elimination of such present procompetitive effects may render a merger unlawful under ง 7.

Although the concept of perceived potential entry has been accepted in the Court's prior ง 7 cases, the potential-competition theory upon which the Government places principal reliance in the instant case has not. The Court has not previously resolved whether the potential-competition doctrine proscribes a market extension merger solely on the ground that such a merger eliminates the prospect for long-term deconcentration of an oligopolistic market that in theory might result if the acquiring firm were forbidden to enter except through a de novo undertaking or through the acquisition of a small existing entrant (a so-called foothold or toehold acquisition). Falstaff expressly reserved this issue.^[28]

*626 The Government's potential-competition argument in the instant case proceeds in five steps. First, it argues that the potential-competition doctrine applies with full force to commercial banks. Second, it submits that the Spokane commercial banking market is sufficiently concentrated to invoke that doctrine. Third, it urges us to resolve in its favor the question left open in Falstaff. Fourth, it contends that, without regard to the possibility of future deconcentration of the Spokane market, the challenged merger is illegal under established doctrine because it eliminates NBC as a perceived potential entrant. Finally, it asserts that the merger will eliminate WTB's potential for growth outside Spokane. We shall address those points in the order presented.

A. Application of the Doctrine to Commercial Banks.

Since United States v. Philadelphia National Bank, 374 U. S. 321 (1963), the Court has taken the view that, as a general rule, standard ง 7 principles applicable to unregulated industries apply as well to mergers between commercial banks. See also United States v. First National Bank, 376 U. S. 665 (1964). Congress reacted to Philadelphia National Bank by including in the Bank Merger Act of 1966 a "convenience and needs" defense uniquely applicable to commercial banks. 12 U. S. C. ง 1828 (c) (5) (B) and (c) (7) (B). Subsequent cases have revealed, however, that that defense comes into play only after a district court has made a de novo determination of the status of a bank merger under the Clayton Act. See United States v. Third National Bank, 390 U. S. 171 (1968); United States v. First City National Bank, 386 U. S. 361 (1967). As the Court noted in Phillipsburg National Bank, supra, "the antitrust standards of . . . *627 Philadelphia National Bank . . . were preserved in the Bank Merger Act of 1966." 399 U. S., at 358.^[29]

Although the Court's prior bank merger cases have involved combinations between actual competitors operating in the same geographic markets, an element that distinguishes them factually from this case, they nevertheless are strong precedents for the view that ง 7 doctrines are applicable to commercial banking. In accord with the general principles of those cases, we hold that geographic market extension mergers by commercial banks must pass muster under the potential-competition doctrine. We further hold, however, that the application of the doctrine to commercial banking must take into account the unique federal and state regulatory restraints on entry into that line of commerce. Failure to do so would produce misconceptions that go to the heart of the doctrine itself.

The Government's present position has evolved over a series of eight District Court cases, all of them decided unfavorably to its views.^[30] The conceptual difficulty *628 with the Government's approach, and an important reason why it has been uniformly unsuccessful in the district courts, is that it fails to accord full weight to the extensive federal and state regulatory barriers to entry into commercial banking.^[31] This omission is of great importance, because ease of entry on the part of the acquiring firm is a central premise of the potential-competition doctrine.^[32]

Unlike, for example, the beer industry, see Falstaff Brewing Corp., supra, entry of new competitors into the commercial banking field is "wholly a matter of governmental grace . . ." and "far from easy." Philadelphia National Bank, supra, at 367, and n. 44. Beer manufacturers are free to base their decisions regarding entry and the scale of entry into a new geographic market on nonregulatory considerations, including their own financial capabilities, their long-range goals as to markets, *629 the cost of creating new production and distribution facilities, and above all the profit prospects in the target market. They need give no thought to public needs and convenience. No comparable freedom exists for commercial banks. Ease of entry into a market presumes ease of exitโ€”i. e., the withdrawal or financial collapse of a certain number of participants in that market. Reflecting this country's bitter experience of four decades ago that "[a] bank failure is a community disaster. . . ,"^[33] entry into and exit from the commercial banking business have been extensively regulated by the Federal and State Governments. The regulatory barriers to entry include federal and state supervisory controls over the number of bank charters to be granted, designed to limit the number of banks operating in any particular market and thus to prevent bank failures. See id., at 328. In addition, no branch, no matter how small, may be opened without prior approval of the appropriate bank regulatory agency. Moreover, there are state-law restrictions, such as those in force in Washington, on de novo geographic expansion through branching and multibank holding companies. As noted earlier, Washington statutes forbid branching into cities and towns where the expanding bank does not maintain its headquarters and other banks operate, and they forbid branching from a branch in such areas. See supra, at 609-611. Similarly, Washington permits only one-bank holding companies. Supra, at 611-612.

In Philadelphia National Bank, supra, the Court relied on regulatory barriers to entry to support its conclusion that mergers between banks in direct competition in the same market must be scrutinized with particular care under ง 7. 374 U. S., at 352, 367-370, 372. But the same *630 restrictions on new entry render it difficult to hold that a geographic market extension merger by a commercial bank is unlawful under the potential-competition doctrine. Such limitations often significantly reduce, if they do not eliminate, the likelihood that the acquiring bank is either a perceived potential de novo entrant or a source of future competitive benefits through de novo or foothold entry. Similarly, the Court noted in Philadelphia National Bank that under applicable state law de novo branching in the relevant market was permissible and presented an "alternative to the merger route . . . ." Id., at 370. In this case, by contrast, there are serious questions whether an "alternative to the merger route" through branching or a functional equivalent is a legal or feasible method of entry by NBC into the Spokane market.

B. Structure of the Spokane Market.

Since the legality of the challenged merger must be judged by its effects on the relevant product and geographic markets, commercial banking in the Spokane metropolitan area, it is imperative to determine the competitive characteristics of commercial banking in that section of the country. The potential-competition doctrine has meaning only as applied to concentrated markets. That is, the doctrine comes into play only where there are dominant participants in the target market engaging in interdependent or parallel behavior and with the capacity effectively to determine price and total output of goods or services. If the target market performs as a competitive market in traditional antitrust terms, the participants in the market will have no occasion to fashion their behavior to take into account the presence of a potential entrant. The present procompetitive effects that a perceived potential entrant may produce in an *631 oligopolistic market will already have been accomplished if the target market is performing competitively. Likewise, there would be no need for concern about the prospects of long-term deconcentration of a market which is in fact genuinely competitive.

In an effort to establish that the Spokane commercial banking market is oligopolistic, the Government relied primarily on concentration ratios indicating that three banking organizations (including WTB) control approximately 92% of total deposits in Spokane. The District Court held against the Government on this point, finding that "a highly competitive market" existed which "does not suffer from parallel or other anticompetitive practices attributable to undue market power." 1973-1 Trade Cas. ถ 74,496, p. 94,246. The court apparently gave great weight to the testimony of the banks' expert witnesses concerning the number of bank organizations and banking offices operating in the Spokane metropolitan area. The record indicates that neither the Government nor the appellees undertook any significant study of the performance, as compared to the structure, of the commercial banking market in Spokane.

We conclude that by introducing evidence of concentration ratios of the magnitude of those present here the Government established a prima facie case that the Spokane market was a candidate for the potential-competition doctrine. On this aspect of the case, the burden was then upon appellees to show that the concentration ratios, which can be unreliable indicators of actual market behavior, see United States v. General Dynamics Corp., 415 U. S. 486 (1974), did not accurately depict the economic characteristics of the Spokane market. In our view, appellees did not carry this burden, and the District Court erred in holding to the contrary. Appellees introduced no significant evidence of the absence of parallel *632 behavior in the pricing or providing of commercial bank services in Spokane.^[34]

We note that it is hardly surprising that the Spokane commercial banking market is structurally concentrated. As the Government's expert witness conceded, all banking markets in the country are likely to be concentrated.^[35] This is so because as a country we have made the policy judgment to restrict entry into commercial banking in order to promote bank safety. Thus, most banking markets in theory will be subject to the potential-competition doctrine. But the same factor that usually renders such markets concentrated and theoretical prospects for potential-competition ง 7 casesโ€”regulatory barriers to new entryโ€”will also make it difficult to establish that the doctrine invalidates a particular geographic market extension merger.

C. Potential De Novo or Foothold Entry.

The third step in the Government's argument, resolution of the question reserved in Falstaff, was the primary basis on which the case was presented to the District *633 Court^[36] and to us. The Government contends that the challenged merger violates ง 7 because it eliminates the alleged likelihood that, but for the merger, NBC would enter Spokane de novo or through a foothold acquisition. Utilization of one of these methods of entry, it is argued, would be likely to produce deconcentration of the Spokane market over the long run or other procompetitive effects, because NBC would be required to compete vigorously to expand its initially insignificant market share.

Two essential preconditions must exist before it is possible to resolve whether the Government's theory, if proved, establishes a violation of ง 7. It must be determined: (i) that in fact NBC has available feasible means for entering the Spokane market other than by acquiring WTB; and (ii) that those means offer a substantial likelihood of ultimately producing deconcentration of that market or other significant procompetitive effects. The parties are in sharp disagreement over the existence of each of these preconditions in this case. There is no dispute that NBC possesses the financial capability and incentive to enter. The controversy turns on what methods of entry are realistically possible and on the likely effect of various methods on the characteristics of the Spokane commercial banking market.

It is undisputed that under state law NBC cannot establish de novo branches in Spokane and that its parent holding company cannot hold more than 25% of the stock of any other bank. Entry for NBC into Spokane therefore must be by acquisition of an existing bank. The Government contends that NBC has two distinct alternatives for acquisition of banks smaller than WTB and that either alternative would be likely to benefit the Spokane commercial banking market.

First, the Government contends that NBC could arrange *634 for the formation of a new bank (a concept known as "sponsorship"), insure that the stock for such a new bank is placed in friendly hands, and then ultimately acquire that bank. Appellees respond that this approach would violate the spirit if not the letter of state-law restrictions on bank branching. They note that this method would require the issuance of either a state or a national charter, and they assert that neither state nor federal banking authorities would be likely to grant a charter for a new bank in a static, "well-banked" market like Spokane. Moreover, it is argued that such officials would be certain to refuse to do so where the purpose of the scheme was to avoid the requirements of the state branching law.^[37] Appellees further note that the stock and assets of any new state bank in Washington are inalienable for at least 10 years without approval of state banking officials, see Wash. Rev. Code Ann. ง 30.08.020 (7), and they argue that such officials would refuse to grant approval for sale as part of a sponsorship plan.

The Government counters by pointing to instances in which sponsorship-acquisition of small banks by large banks has occurred in Washington, on occasion with the apparent knowledge and asserted approval of bank regulatory officials and within less than 10 years of the formation of the new bank.^[38] Indeed, the Government contends that NBC is presently sponsoring a small bank in an unrelated area of Washington with the purpose of ultimate acquisition and conversion of the bank into a branch of NBC. Appellees reply that if sponsorship by other banks has occasionally occurred, it is nonetheless *635 illegal under state law and that prior instances of tolerated illegality do not convert an illegal process into a legal one. NBC also denies that it has ever engaged in sponsorship solely for the purpose of acquisition, and it insists that even if a new bank is sponsored there is no guarantee that the sponsor, rather than some other bank willing to outbid it, will acquire the sponsored bank.^[39] Appellees further point out, as is confirmed by the record, that the United States has not shown that any bank in Washington has ever used sponsorship-acquisition as a means of entering a major metropolitan area. In fact, the Government's principal witness in support of its sponsorship theory conceded on cross-examination that his bank "wouldn't consider trying to use that method in getting into" a major city.^[40]

In its findings and conclusions, the District Court did not resolve the question of the status of the Government's proposed sponsorship-acquisition approach under Washington's banking statutes.^[41] We similarly decline to decide this issue. Although we note that the intricate *636 procedure for entry by sponsorship espoused by the Government can scarcely be compared to the de novo entry opportunities available to unregulated enterprises such as beer producers, see Falstaff, supra, we will assume, arguendo, that NBC conceivably could succeed in sponsoring and then acquiring a new bank in Spokane at some indefinite time in the future. It does not follow from this assumption, however, that this method of entry would be reasonably likely to produce any significant procompetitive benefits in the Spokane commercial banking market. To the contrary, it appears likely that such a method of entry would not significantly affect that market.

State law would not allow NBC to branch from a sponsored bank after it was acquired. NBC's entry into Spokane therefore would be frozen at the level of its initial acquisition. Thus, if NBC were to enter Spokane by sponsoring and acquiring a small bank, it would be trapped into a position of operating a single branch office in a large metropolitan area with no reasonable likelihood of developing a significant share of that market.^[42] This assumed method of entry therefore would offer little realistic hope of ultimately producing deconcentration of the Spokane market. Moreover, it is unlikely that a *637 single new bank in Spokane with a small market share, and forbidden to branch, would have any other significant procompetitive effect on that mar