Cell competition employs comparisons of fitness to selectively eliminate cells sensed as less healthy. In Drosophila, apoptotic elimination of the weaker "loser" cells from growing wing discs is induced by a signaling module consisting of the Toll ligand Spätzle (Spz), several Toll-related receptors, and NF-κB factors. How this module is activated and restricted to competing disc cells is unknown. Here, we use Myc-induced cell competition to demonstrate that loser cell elimination requires local wing disc synthesis of Spz. We identify Spz processing enzyme (SPE) and modular serine protease (ModSP) as activators of Spz-regulated competitive signaling and show that "winner" cells trigger elimination of nearby WT cells by boosting SPE production. Moreover, Spz requires both Toll and Toll-8 to induce apoptosis of wing disc cells. Thus, during cell competition, Spz-mediated signaling is strictly confined to the imaginal disc, allowing errors in tissue fitness to be corrected without compromising organismal physiology.