You may make more profit per unit of an A8 than an A3. But in NO way are you going to make more on the A8 than the A3 when you consider the enormous difference in volume. It's better for Audi to have a bigger market than focus on high end, especially since they are now and more and more becoming just VWs with a nicer interior.
Mercedes the same thing. However Mercedes has two aces up its sleeve. The S-class and G-class. The S is still the standard bearer for luxury cars so as long as that exists it will not erode too much into the brand. The G-class is also a standard bearer for its function and its own market niche. The Mercedes brand, people need to remember, is more Toyota than Rolls. Even stateside we are finally seeing more Mercedes trucks (I even finally saw a Mercedes semi a month ago).
There's no point in sticking with high end and pushing off all the "low end" customers. Doing that leads to what happened to Aston (who had to rebadge a Toyota iQ into this monstrosity
to meet fuel economy standards). Or being bought by someone else. Let's not forget that Rolls Royce (BMW), Bentley and Lamborghini (VW), Maserati and Ferrari (Fiat), Jaguar (Tata) all could not survive without folding into a more mainstream manufacturer. I'd rather they attract a "lower end" customer and survive than disappear. Heck, Audi's been a VW for half a century now.
The only exception to this is Porsche buying VW, but even then it's VW who is in charge now, not Porsche.
Think of it this way, do you think the Bugatti Veyron would have ever been built if it didn't have the finances VW had at its disposal? Better to survive and dilute a bit (or not at all) than stand proud and fade away. Or build a Cygnet.