UMKM Regulation in E-Commerce Needs Caution; Poorly Designed Rules Could Prove a Double-Edged Sword

Indonesia’s government plans to reframe protections for micro, small and medium enterprises (UMKM) in digital marketplaces or e-commerce. The plan emerged in a working meeting with the House of Representatives (DPR) some time ago. The meeting was held in response to the rising volume of imported products and the dynamics of platforms’ algorithms which are viewed as affecting the competitiveness of local business players.

SigmaPhi Indonesia researcher Hardy R Hermawan says the protective measures for UMKM are indeed reasonable. However, he warns that policies crafted should not become a ‘double-edged sword’ for business actors they aim to help.

‘Amid the onslaught of imported products and the dynamics of algorithms, the country must pay attention to local UMKM. Yet, these protections must be built on robust scientific principles,’ Hardy said in a written statement received by Kompas.com on Wednesday, 4 March 2026.

Hardy explains that the digital economy is a two-sided market as described by Jean-Charles Rochet and Jean Tirole (2003). In this model, platforms act as intermediaries that balance incentives between sellers and buyers.

‘The pricing structure resembles a see-saw. If one side is squeezed through regulation, the other will respond automatically,’ he said.

As an example, if administrative costs for local UMKM products are reduced, platforms could seek compensation elsewhere, such as by reducing shipping-cost discounts or increasing consumer service charges.

In an price-elastic ecosystem, higher costs on the buyer side can depress overall demand.

‘Protections intended to help margins could end up reducing transactions,’ he said.

He also highlighted the ‘waterbed effect’, as described by Belleflamme and Peitz (2015). This phenomenon illustrates that when one side is squeezed, the other can push up.

According to Hardy, when core administrative costs are strictly capped, platforms have incentives to shift the burden onto other instruments not yet specifically regulated. For example, raising search ads fees, premium membership fees, or participation fees in annual campaigns.

‘The absence of transparency and very detailed oversight means the real burden borne by UMKM does not truly lessen. The burden simply shifts categories,’ he said.

This article is part of Lestari KG Media, an initiative to accelerate Sustainable Development Goals.