The strength of certain visual illusions is weakened in individuals with schizophrenia. Such phenomena have been interpreted as the impaired integration of inhibitory and excitatory neural responses, and impaired top–down feedback mechanisms. To investigate whether and how these factors influence the perceived illusions in individuals with schizophrenia, we propose a two-layer network that can model visual receptive fields (RFs), their inhibitory and excitatory subfields, and the top-down feedback. Our neural model suggests that illusion perception changes in individuals with schizophrenia can be influenced by altered top-down mechanisms and the organization of the on-center off-surround receptive fields. Alteration of the RF inhibitory surround and/or the excitatory center can replicate the difference of illusion precepts between individuals with schizophrenia and normal controls. The results show that the simulated top-down feedback modulation enlarges the difference of the model illusion representations, replicating the difference between the two groups. We propose that the heterogeneity of visual and in general sensory processing in schizophrenia can be largely explained by the degree of top-down feedback reduction, emphasizing the critical role of top-down feedback in illusion perception, and to a lesser extent on the imbalance of excitation/inhibition. Our neural model provides a mechanistic explanation for the modulated visual percepts in schizophrenia with findings that can explain a broad range of visual perceptual observations in previous studies. The two-layer motif of the current model provides a general framework that can be tailored to investigate subcortico-cortical (such as thalamocortical) and cortico-cortical networks, bridging neurobiological changes in schizophrenia and perceptual processing.