Grazing is known as one of the key factors for diversity and community composition in grassland ecosystems, but the response of plant communities towards grazing varies remarkably between sites with different environmental conditions. It is generally accepted that grazing increases plant diversity in productive environments, while it tends to reduce diversity in unproductive habitats (grazing reversal hypothesis). Despite empirical evidence for this pattern the mechanistic link between modes of plant–plant competition and grazing response at the community level still remains poorly understood. Root-competition in particular has rarely been included in theoretical studies, although it has been hypothesized that variations in productivity and grazing regime can alter the relative importance of shoot- and root-competition. We therefore developed an individual-based model based on plant functional traits to investigate the response of a grassland community towards grazing. Models of different complexity, either incorporating only shoot competition or with distinct shoot- and root-competition, were used to study the interactive effects of grazing, resource availability, and the mode of competition (size-symmetric or asymmetric). The pattern predicted by the grazing reversal hypothesis (GRH) can only be explained by our model if shoot- and root-competition are explicitly considered and if size asymmetry of above- and symmetry of below-ground competition is assumed. For this scenario, the model additionally reproduced empirically observed plant trait responses: erect and large plant functional types (PFTs) dominated without grazing, while frequent grazing favoured small PFTs with a rosette growth form. We conclude that interactions between shoot- and root-competition and size symmetry/asymmetry of plant–plant interactions are crucial in order to understand grazing response under different habitat productivities. Our results suggest that future empirical trait surveys in grassland communities should include root traits, which have been largely ignored in previous studies, in order to improve predictions of plants’ responses to grazing.