We used a dual–masking paradigm to study how contrast discrimination can be influenced by the presence of adjacent stimuli. The task of the observer was to detect a target superimposed on a pedestal in the presence of flankers. The flankers (i) reduce the target threshold at zero pedestal contrast, (ii) shift the target threshold versus pedestal contrast (TvC) function horizontally to the left on a log–log plot at high pedestal contrasts, and (iii) reduce the size of pedestal facilitation at low pedestal contrasts. The horizontal shift at high pedestal contrasts suggests that the flanker effect is a multiplicative factor that cannot be explained by previous models of contrast discrimination. We extend the divisive inhibition model of contrast discrimination by implementing the flanker effect as a lateral multiplicative sensitivity modulation. This extended model provides a good account of the data.