There is another type of collar that prevents them gnawing on themselves, it called "Bite Not". It prevents them from bending their neck, so they can't make themselves worse, but they don't run into everything, like your knees.
http://petfoodexpress.com//shopping/prod_detail/main.asp?productID=4953&catID=NaN
It is possible that your dog has a food allergy. I have a Golden Retriever that gets skin "hot spots" if we give her normal dog food. As ridicules as this sounds, we have been feed her duck and potato dog food for the past few years, and she hasn't had the problems.
Tom