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According to the online manual, market size means exactly that, the size of the market. For example, in my current MLB setup the Royals have an $85.9 million dollar payroll and a market size of 2, their market classification is "Tiny" The Astros on the other hand have a payroll of $22.6 million dollars and a market size of 7, their market classification is "Rather Big"
-As for your other question, if you plan on playing in all small towns, then yes you can set all of your markets in the tiny, small range its all up to you. Just remember to be consistent with all financial aspects of the game and you'll be fine(I haven't played fictional really so I can't help you set up a financial system from scratch, but I'm sure someone can)
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