In economics there is a term called “Race to the Bottom”.

Basically, this means companies scouring the globe to find places that offer the cheapest labour and the slackest employment legislation. While prestige car brands are not engaging in that sort of activity, they do seem to be racing towards the bottom of the car market. With Audi, BMW and Mercedes all having launched their second-generation lower medium models, now is a good time to take stock of whether this has been a good move.

Generally speaking, the move has been a success in terms of sales. From a standing start, all three manufacturers are achieving at least half as much market share in the lower medium segment as they are in the upper medium segment. Given how established compact executive cars are in the UK, that is a pretty good result.

However, it is interesting that just slapping a prestige badge on the front of a small car is not enough, as has been proven by the odd failure.

The Audi A2 has got nowhere near its sales targets as it managed to solve a number of non-existent problems. Lightweight aluminium construction makes a lot of sense for a big luxury car, such as the new Jaguar XK8, but in a small car, aluminium is just a feature, not a benefit.

The A2, with its high technology, was intended to bring Audi to a younger audience of trend-setting 30-somethings. Instead, its compact dimensions, high quality and tall stance made it perfect for a small number of affluent older people.

In the case of BMW, the 3-series Compact is being dropped as the far bigger-selling 1-series has taken over.

So is a lower medium car the automotive equivalent of a free hit for the prestige brands – simply offer the prestige badge to a wider clientele and watch the money roll in?

Unfortunately not. When a prestige brand goes downmarket, it inevitably dilutes the brand value to some extent. The more convincing the smaller car, the less damage it will do, but there will always be some collateral damage.

That’s why Mercedes has worked hard to improve the perceived quality of the new A-class: this generation feels like a Mercedes, whereas early MkI models had interior plastics apparently borrowed from a budget brand.

The major factor in the move downmarket is that it will work so long as everyone does it. If all three German brands move into the lower medium segment, then none of them loses their prestige aura relative to the others.

Theoretically, that should create an opportunity for other prestige brands to cash in on their more exclusive status but, clearly, that has not happened.

The spectre at the feast is Lexus, who believes it is the one best placed to attack the slightly diluted images of the big three German marques in the UK prestige market.