Thanks for that further information. Based on what you are telling me, there are a few possibilities for what may be going on. I would wonder about hives, folliculitis and acute moist pyoderma as possibilities.
1. Hives look like lumps all over the body - not usually just in one area. Hives are due to an allergic reaction that causes these swellings. It can be to an insect sting, or to a medication.
With hives, I usually suggest that people treat their dogs for this with BENADRYL (diphenhydramine). The dose that one generally gives is 1mg/lb. Is he about 25lbs? It comes as 25 mg tablets, and if he is 25lbs, and this looks like hives you can treat him with benadryl. The does for a 25lb dog would be ONE TWO TABLETS. This can be repeated every 8 hours for 24-36h.
Here is more about Benadryl:
You should see improvement within 30 minutes.
In the meantime, apply cool compresses (a small towel dipped in cold water and wrung out) to the affected areas.
Here is more about allergic reactions in dogs:
If the swelling is increasing in size or starting to include other areas such as around his face or nose, I suggest you take him to your veterinarian immediately. Please stay with him until it starts to come down because if it starts to cause swelling in his airways this could be serious. If it comes down with the Benadryl, it raises the index of suspicion that this is an allergic reaction.
2. If your small dog does NOT respond to the Benadryl that would suggest that this is not hives, but instead is something called folliculitis, which is an inflammation of the hair follicle. There is even a name for it: "Short coat Folliculitis." Sounds impressive, doesn't it? It is generally caused by a bacterial infection in the hair follicle. These bacteria are just the normal ones that are present on normal skin, but they have invaded into her follicles. Short haired dogs are prone to this.
Now, in terms of what to do about it, I must warn you that it often takes 30 to 60 days on an antibiotic (usually cephalexin) to resolve this. If, however, you want to try to treat this at home first, you could use a benzoyl peroxide shampoo but make sure to condition afterwards (I recommend an oatmeal conditioner). You can get the shampoo at your veterinary hospital, or at a big pet store (PetSmart might have it) or on-line. Try shampoo/condition her once and see if there is any improvement. If there isn't within a day or two, I suggest you take her to your veterinarian.
I'll give you some links:
About folliculitis: http://www.medi-vet.com/Canine-Pyoderma.html
http://www.peteducation.com/article.cfm?cls=2&cat=1593&articleid=423 (mentioned in the chart)
example of Shampoo: http://www.allivet.com/DermaPet-Benzoyl-Peroxide-Plus-Shampoo-p/26935.htm
example of Conditioner: http://www.calvetsupply.com/index.asp?PageAction=VIEWPROD&ProdID=373
3. The 3rd possibility is that your dog may a "hot spot." A hot spot is the common name for "acute moist pyoderma" which is a type of skin infection.
There are commonly yeast and bacteria living in small numbers on the skin surface. When a dog starts chewing or scratching at one spot, she opens up little scratches in the skin surface, and the yeast and bacteria invade there. The fur stays wet from oozing serum from the scratchs, and this keeps the area moist and warm - just the kind of place that bacteria like to grow! As the bacterial numbers increase, the scratches get infected and ITCHY! The dog scratches more... and soon a large area of red, raw, weeping infection can occur.
More about hot spots:
Treatment involves shaving all the hair in the affected area - which is often quite large. This allows the skin to dry out. Antibacterial washes are used on the skin and antibiotics (usually for 2-4 weeks) are given by mouth. If it is very inflamed and itchy, a short course of corticosteroids would likely be used to give the dog relief and stop him from scratching and thus exacerbating the problem.
So, from what you are describing, if I saw your boy, I would be examining him for evidence of hives, folliculitis and pyoderma. Your description makes me most suspicious about this being folliculitis as you describe it as tufts of hair that stand up. That is exactly what folliculitis looks like. So, you may wish to try the suggested shampoos and conditioner to see if this leads to any improvement. If your boy's condition is not improving, or if it is spreading elsewhere on his body, then I visit to your vet would be prudent.
Good luck with your dog!