The importance of competition in local geographic markets has increased as the consumption of non-tradable goods and services has risen compared to tradable ones. Leveraging confidential matched employer-employee microdata and detailed geographic information on firms and workers, I document new evidence on the rise in firms’ geographic expansion and local competition in Canada between 2001-2018. To account for these trends, I build a new dynamic general equilibrium model of firms’ geographic expansion decisions incorporating multiple markets and Cournot oligopolistic competition in local markets. I estimate the model for two periods and find that three factors are crucial to match the observed trends: (1) increased innovation costs for entrepreneurs, (2) a compositional shift toward less productive and less expansion-efficient entrants, and (3) greater product differentiation between local varieties. The decentralized equilibrium is inefficient due to various externalities associated with firms’ geographic expansion. This supports the need for taxing or subsidizing firms’ geographic expansion costs to increase welfare. I find that subsidizing the geographic expansion of more productive and more
expansion-efficient firms can substantially increase efficiency and social welfare.