Abstract: The dynamic competition process of duopoly manufacturers with bounded rationality and service differentiation is addressed in this paper. With service competition considered, by using Cournot duopoly model, a repeated game model is established for the problem. Based on the model, balanced condition is analyzed in view of system evolution. With the balanced condition, a numerical simulation is performed. By numerical simulation, the influence of duopoly rationality and service level on duopoly manufacturers is analyzed. It shows that when the competition between duopoly manufacturers with bounded rationality enters a chaotic state, level of service and duopoly profit are not absolutely positively correlated. The best choice for duopoly manufacturers is to strictly control the output adjustment speed based on the comprehensive analysis of duopoly manufacturers' service levels and output competition strategy such that excessive competition is avoided and a system steady equilibrium is maintained.