The precise mechanism by which synaptic excitation and inhibition interact with each other in odor coding through the unique dendrodendritic synaptic microcircuits present in olfactory bulb is unknown. Here a scaled-up model of the mitral-granule cell network in the rodent olfactory bulb is used to analyze dendrodendritic processing of experimentally determined odor patterns. We found that the interaction between excitation and inhibition is responsible for two fundamental computational mechanisms: (1) a balanced excitation/inhibition in strongly activated mitral cells, leading to a sparse representation of odorant input, and (2) an unbalanced excitation/inhibition (inhibition dominated) in surrounding weakly activated mitral cells, leading to lateral inhibition. These results suggest how both mechanisms can carry information about the input patterns, with optimal level of synaptic excitation and inhibition producing the highest level of sparseness and decorrelation in the network response. The results suggest how the learning process, through the emergent development of these mechanisms, can enhance odor representation of olfactory bulb.