The retina is divided into parallel and mostly independent ON and OFF pathways, but the ON pathway "cross" inhibits the OFF pathway. Cross inhibition was thought to improve signal processing by the OFF pathway, but its effect on contrast encoding had not been tested experimentally. To quantify the effect of cross inhibition on the encoding of contrast, we presented a dark flash to an in vitro preparation of the mammalian retina. We then recorded excitatory currents, inhibitory currents, membrane voltages, and spikes from OFF α-ganglion cells. The recordings were subjected to an ideal observer analysis that used Bayesian methods to determine how accurately the recordings detected the dark flash. We found that cross inhibition increases the detection accuracy of currents and membrane voltages. Yet these improvements in encoding do not fully reach the spike train, because cross inhibition also hyperpolarizes the OFF α-cell below spike threshold, preventing small signals in the membrane voltages at low contrast from reaching the spike train. The ultimate effect of cross inhibition is to increase the accuracy with which the spike train detects moderate contrast, but reduce the accuracy with which it detects low contrast. In apparent compensation for the loss of accuracy at low contrast, cross inhibition, by hyperpolarizing the OFF α-cell, reduces the number of spikes required to detect the dark flash and thereby increases encoding efficiency.