In many developing and regenerating systems, tissue pattern is established through gradients of informative morphogens, but we know little about how cells interpret these. Using experimental manipulation of early chick embryos, including misexpression of an inducer (VG1 or ACTIVIN) and an inhibitor (BMP4), we test two alternative models for their ability to explain how the site of primitive streak formation is positioned relative to the rest of the embryo. In one model, cells read morphogen concentrations cell-autonomously. In the other, cells sense changes in morphogen status relative to their neighbourhood. We find that only the latter model can account for the experimental results, including some counter-intuitive predictions. This mechanism (which we name the 'neighbourhood watch' model) illuminates the classic 'French Flag Problem' and how positional information is interpreted by a sheet of cells in a large developing system.