Recently there have been many revolutions in the marketing distribution. The appearance of superstore and the chain store changes the leader position of the manufacturer, and hence these intense the competition among the channel members. After these revolutions the manufacturers, the up side of the marketing channel, not only need anticipate the reaction of the retailers, but understand the interest of their own retailers to gain the maximum of benefit. In this paper we develop a generalized model by employing game theory to investigate the optimal cooperative advertising participation rates under introducing the conception of channel competition and product differentiation into cooperative advertising. It shows that product differentiation benefits manufactures at the same time hurting retailer. It benefits retailer while advertising effect has more powerful effect on market demand. Finally, managerial implications of the results are derived and some suggestions for future research are offered.