Abstract: This research topic cames from the argument about the countervailing power. Most of literature concentrate on the characteristics of suppliers and retailers, but do not reach relatively consistent conclusions and could not accurately distinguish the sources of the countervailing power from the changes in the industrial structure or from retailers' behavior. In particular, factors outside the industrial chain, such as preferences and behavior of the consumers, have important implications for the accurate study of the formation mechanism of the countervailing power. In this study heterogeneous consumer preferences are introduced into a dynamic game model, and the formation mechanism and effects of countervailing power are considered. The results show that the heterogeneous consumer preference is a necessary condition for the supplier and the retailer with stronger consumer preference to negotiate and to cooperate. However, they will negotiate and reach an agreement only when the profit sharing rule is within a certain interval. When consumer preferences towards the retailers are heterogeneous, the dominant retailer possesses a stronger bargaining capacity. The retailer's countervailing power increases with its consumer preference. In addition, countervailing power can improve the consumer's utility as well as the social welfare. The existing literature about the formation of the countervailing power are enriched and some theoretical reference for the firms and regulatory agencies is provided through this study.

Key words: countervailing power, consumer preference, price decisions, cooperative game