It doesn't really matter the size of the group. For example if people in California never played anybody in Michigan you would still have a problem. In Mike's example, if both Nowhereville and Phoenix had the same offset, then playing between each other wouldn't solve anything. As I mentioned in my very first post here, there needs to be enough cross pollination (people in groups playing people in other groups) in order level out the ratings. It is an interesting problem to me.
Yes, except that does not happen, and all you need is a handful of differently ranked players to even things out. It is very very unlikely that a pool hall happens to have everyone in it the same level. There will be a guy there that is a 600, a guy there that is a 500, 4 people that are 450, another few that are 480, maybe a couple of 700s if it's a good area, etc... They will play each other and establish the ranking there. The ONLY way this will not work is if the sample is like 2 or 3 people very close to rank and they only play each other or one is much stronger than the other which are the same level; then there may be some odd ratings if say the best player is a 500 but the other two are like 200 level and the guy keeps beating them 6-1 or 6-2. Then his starting rating may shoot up to like 700 to their 500 if no one ever visits them and points out their actual skill levels and that gets adjusted. It's like finding a hidden race of humans that never developed technology, at first they won't know what a car is, but in a few years they will be complaining about gas prices like the rest of us.
Keep in mind this is not a rating that is now just floating around with random stats, it's established over thousands of games and players what people of a certain Fargo rating can do at the table, and we can now easily sort them properly with a decent amount of accuracy, say within 50 points, and have the system go from there over time and results. This is a bit like the argument flat earthers use, they take everything we learned so far as humans and just say "well, I am going to start over cause I was taught to question things and just go by what I see with my own eyes". We don't need to start at 0 again in anything. Even if this unknown group of players that never played anyone else starts at same starting Fargo rating, say 400, eventually the better players will go up, the worse players will go down and those at that 400 level will stay there.
Players A, B and C are all 400 Fargo starting level just as a random assignment. C starts playing A and losing like 5-1, 5-2, A's Fargo rating starts to go up based on that. B plays C, C loses 5-3, 5-4 to him often, so B goes up a bit over C at 400 but since he is not as good as A his Fargo does not go up as high since his matches are closer in scores to C. B plays A and loses 5-3, 5-4 normally, Fargo sees that and adjusts them again a bit. So it goes for a bit, and these 3 players, A B C level, only playing each other, will end up in about their correct Fargo scores.