Eventually these manufactures will have to phase out certain product lines. Otherwise they'll end up being the size of the Hindenburg, because with every redesign they make them bigger than the previous design. Take the BMW 3-series for example. It's currently the size of what a 5-series was 10 years ago. It's also the reason BMW will push heavily the upcoming 2-series. The 2 series is eventually meant to someday take the place of the 3-series in size and popularity.
Who knows. I can see Mercedes phasing out the C-class eventually if the next several gen redesigns if the CLA end up being larger than what it is now. I'm talking in the distant future.
I'm not sure what information you have today that would lead you to believe Mercedes might (eventually) phase out its bread and butter model for a less practical one that has yet to prove itself.
I'm not worried about the S-Class/7-Series/A8 segment cars or their smaller siblings becoming the size of the Hindenburg. I do agree though that increasing the size of each generation of a model gets silly and I do believe that manufacturers will eventually reach limits with certain models (or phase them out as they become obsolete to buyers). But, the only thing that's going to thin the current trend of model diversification we're seeing is poor sales (whether due to financial crisis, changes in auto trends -- design preferences, environmental concerns, etc.) or some other weakening of the business that forces the companies to consolidate and limit offerings. Right now, surprisingly, nothing suggests that any of the current model ranges are stepping on one another's respective toes. Certainly, the current C250, E350, S350 are differentiated enough by their size. It's only the "four door coupes" that potentially upset sales in those existing sedan segments. Whether the "four door coupe" design is here for the long term remains to be seen. For that matter, who knows what will happen to the traditional sedan in the future? For now, there appear to be enough interested buyers to satisfy the need for separate "sedan" and "four door coupe" lines of vehicles.
When the AMC Eagle was (failing) on the market back in the '80s, who would have predicted that 10 yrs later a bunch of companies would turn the concept into a success (e.g., Volvo XC70, Audi Allroad, Subaru Outback anyone)? Have you ever seen what designs from GM and other manufacturers from the '50s and '60s suggested cars might look like around the turn of the century? Boy did they get
that wrong. Unless you are prescient (in which case I have a question for you about a lottery ticket), what happens in the
distant automotive future is a complete unknown -- especially with respect to phasing out of currently successful models.
-Eric