It could be anything from an infection to a benign cyst to cancer. Best to have your vet evaluate it. If it's a cyst (most likely) it shouldn't require any treatment or surgical removal unless the dog chews at it or it gets so large that it interferes with movement. You'll be able to feel a cyst kind of float around underneath the tissues, and they aren't painful. I had a dog with one in the same location for the majority of her 14 years. It came up suddenly and was the size of a small golf ball. Never caused any problems at all.
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