I agree with SQLSister. The exchange, although friendly, is unprofessional and shouldn't take place in the office. You never know who is listening or might overhear the remarks. And regardless of whether or not anyone did actually hear, preventing it from happening in the future is part of a manager's responsibility.
That being said, I also agree that the way the manager dealt with the problem is lacking. C should not be brought up in the conversation between A and B, and I don't think the manager should focus on 'dissing each other', but rather something along the lines of "I know you guys are just playing, but this may not be the best time and place for it."
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