The retina can function under a variety of adaptation conditions and stimulus paradigms. To adapt to these various conditions, modifications in the phototransduction cascade and at the synaptic and network levels occur. In this paper, we focus on the properties and function of a gain control mechanism in the cone synapse. We show that horizontal cells, in addition to inhibiting cones via a "lateral inhibitory pathway," also modulate the synaptic gain of the photoreceptor via a "lateral gain control mechanism." The combination of lateral inhibition and lateral gain control generates a highly efficient transformation. Horizontal cells estimate the mean activity of cones. This mean activity is subtracted from the actual activity of the center cone and amplified by the lateral gain modulation system, ensuring that the deviation of the activity of a cone from the mean activity of the surrounding cones is transmitted to the inner retina with high fidelity.