As I spend more time reading, thinking and designing on aspects of Cosolvent, I am gradually assembling a broader and clearer picture of the Thin Market automation challenge. My latest and best understanding is outlined in the following table. When I think about possible examples, I lean toward the view that a functionally thin market does not need to exhibit all of these characteristics. It may qualify if it exhibits only 2 or 3 aspects, although many examples do exhibit quite a few more. There is a chance that a market may be thin if it exhibits only one characteristic, but that characteristic is so powerful that it dominates activity. I haven’t thought of a market like that, but it remains a possibility.
| Thin Market Characteristic | Explanation | Examples |
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| Participants generally don’t know or trust each other | In thin markets, the number of buyers and sellers is relatively low, which means many participants lack prior experience or relationships with one another. This absence of familiarity breeds caution, as each party is unsure of the other’s credibility, reliability, or intentions. As a result, trust must be actively built rather than assumed—making information asymmetry, reputation signals, and intermediaries especially important. |
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| Participants may (or may not) trust the market itself | Even if two parties don’t know each other, they may still proceed with a deal if they trust the market mechanism—such as a reputable platform, broker, or rules-based system—to enforce fairness and resolve disputes. In thin markets, however, this institutional trust cannot be taken for granted. Some markets lack the infrastructure or track record needed to inspire confidence, creating hesitation or higher perceived risk for participants. |
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| Thin Markets are more ‘stateful’ than ‘stateless’ | Unlike liquid markets where transactions are relatively independent and memoryless (“stateless”), thin markets tend to accumulate context over time. Each new transaction is shaped by previous interactions, evolving trust levels, and emerging norms or expectations. This “statefulness” makes it harder to design one-size-fits-all market rules and easier for relationship history, tacit knowledge, and institutional memory to influence behavior. |
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| Repeat deals will eventually dominate spot deals | Over time, successful participants in thin markets often shift toward repeat or relational contracting rather than relying on single-shot or “spot” transactions. This pattern emerges because known counterparts reduce uncertainty, transaction costs, and negotiation friction. Repeat deals also allow for customization, coordination, and shared learning, which are critical in low-volume, high-context exchanges |
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| The exchange item isn’t standardized | Thin markets frequently involve products or services that are heterogeneous, complex, or context-sensitive—such as artisanal goods, custom manufacturing, or niche agricultural outputs. This lack of standardization hinders easy comparison and pricing, often requiring negotiation, expert evaluation, or hands-on inspection. As a result, deals are more idiosyncratic and harder to automate or scale. |
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| Fulfillment may be harder than the deal | In many thin markets, the transaction itself (price, terms, agreement) is only the beginning. Actually fulfilling the deal—coordinating logistics, ensuring quality, navigating regulations, or dealing with contingencies—can be more complex and uncertain than the negotiation. This shifts the risk profile of the market and highlights the importance of post-deal services, verification mechanisms, and problem-solving capacity. |
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| Dealmaking may require an exchange of ‘samples’ | Because many exchange items in thin markets are not standardized and buyers may not fully trust seller claims, physical or digital samples often play a critical role in establishing credibility and clarifying expectations. Samples act as proxies for product quality, consistency, or style, helping buyers assess whether the offering meets their needs. In some cases, a sample exchange is not just a prelude to a deal—it is the foundation for building trust, negotiating terms, and reducing the perceived risk of commitment. |
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| High Transaction Costs | In thin markets, each deal often involves significant overhead—negotiation time, due diligence, legal review, logistics coordination, and follow-up. This is exacerbated by lack of standardization, limited competition, and one-off customization. As a result, the cost (time, effort, and money) of each transaction is often high relative to the value exchanged. |
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| Poor Price Discovery | Because there are few participants and little liquidity, reliable market prices may not emerge. Prices can be opaque, volatile, or based on informal benchmarks. This makes it harder for newcomers to assess fair value and for existing participants to compare offers confidently. |
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| Role of Brokers or Trusted Intermediaries | In the absence of a robust platform or trusted institutions, brokers, agents, or informal networks often play a central role in matching participants, mediating deals, and enforcing soft reputations. These intermediaries substitute for market infrastructure and often charge substantial fees, further increasing transaction costs. |
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| Market Entry is Risky or Costly | New entrants to a thin market face steep learning curves, high setup costs (e.g., compliance, logistics, trust-building), and significant uncertainty. These barriers to entry can suppress competition and reinforce the thinness of the market, leading to stagnant dynamics. |
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| Information is Unevenly Distributed | Thin markets often suffer from information asymmetry. One party (typically the seller) may know far more than the other about product quality, fulfillment reliability, or past issues. This increases the risk of adverse selection, where bad actors may dominate and drive out trust. |
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| Regulatory Friction or Ambiguity | Many thin markets exist in gray zones—industries or jurisdictions where regulation is unclear, fragmented, or burdensome. This increases compliance risk and makes formalizing the market harder. For cross-border exchanges, this is even more pronounced. |
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| Demand and/or Supply is Lumpy or Irregular | Volume may be low not just because of limited participants, but because transactions are episodic—a buyer only needs to purchase every few months or years. Similarly, a supplier may only have items to exchange on an occasional or periodic basis. This further limits liquidity and makes forecasting or capacity planning difficult. |
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| Trust and Reputation are Central Assets | Because infrastructure and enforcement are weak, reputation functions as a currency. Long-term participants rely on trust-based relationships, referrals, and informal social capital to reduce risk. This makes new entrants especially vulnerable and creates a “who you know” dynamic. |
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