We studied lateral interactions in the periphery by measuring how contrast discrimination of a peripheral Gabor patch is affected by flankers. In the psychophysical experiments, two Gabor targets appeared simultaneously to the left and right of fixation (4 degrees eccentricity). Observers reported which contrast was higher (spatial 2-alternative-forced-choice). In different conditions, Gabor flankers of different orientation, phase, and contrast were present above and below the two targets, at a distance of three times the spatial Gabor period. The data show that collinear flanks impair discrimination performance for low pedestal contrasts but have no effect for high pedestal contrasts. The transition between these two result patterns occurs typically at a pedestal contrast which is similar to the flanker contrast. For orthogonal flanks, we find facilitation at low pedestal contrasts, and suppression at intermediate contrasts. We account for this complex interaction pattern by a model that assumes that flankers can provide additive input to the target unit, and that they further contribute to the target's gain control, but only in a limited range of pedestal contrasts; once the target contrast exceeds a critical value, inhibition becomes subtractive rather than divisive. We further make specific propositions on how this model could be implemented at the neuronal level and show that a simple integrate and fire unit that receives time-modulated inhibition behaves in a fashion strikingly similar to the model inferred from the psychophysical data.