A model is proposed for the effect of gramicidin A' on the order and structure of phospholipid dispersions. According to this model, the addition of gramicidin A' influences the surrounding lipids via two independent mechanisms. The first arises from a drop in surface pressure for those lipids substantially bounded by gramicidin A'. The second mechanism arises from the increase in the phospholipid headgroup spacing due to the small polar region of the polypeptide. The model provides an explanation for the currently available NMR, X-ray diffraction and Langmuir monolayer results. The model also suggests mechanisms for the ability of gramicidin A' to trigger a transition of the lipid from the lamellar to hexagonal II phase, the dependence of this transition on the lipid chain length and the formation of a lamellar phase with lysophosphatidylcholine.