Would it necessarily be such a terrible outcome? The idea of providing protection for intellectual works is to incentivise the creation of these works rather than to protect any particular brand from being diluted.

What would be the upshot if the character of Mario entered the public domain, in the same way that characters from Greek mythology or Shakespeare are in the public domain?

Nintendo might decide to expend creative effort creating a new set of characters to figurehead their brand, this could well be a win for society at large.

Other unaffiliated developers might then decide to take mario in interesting new creative directions that would not have happened under Nintendo, this could also be a win.