As a developer I can confirm, releasing a paid update on App Store is equivalent to releasing a totally new app.
Basically, to noobify this.
Developers have two options
1) Release the app as an update (free) to the existing app. Existing users get the update free.
2) Release the app as a new app and force all users to purchase it again.
There's no "paid" upgrade option on the App Store unless you count the second option
It's entirely up to the developer on what they do. I have a feeling we're going to start seeing more of number 2 soon. Small developers (1-2 devs) may be able to get by getting more and more users and giving free updates to the existing users. But the larger the company (5+) I don't think it is financially possible to give free updates forever.
The race to free is bad. You should never get the idea that an application should include free updates for life. If you do, you're expecting too much. Think of how much it costs to live. Take your typical paycheck, do you get by on what you live on? Then expect developers to be paid roughly that much each year. Do you not get paid enough? Expect them to get paid more than yourself then.
Now, imagine trying to pay that on a yearly basis. You either have to increase your user base substantially each year or you have to have users pay upgrade fees. At one point it gets difficult to increase your user base. Plus, the more users you have, the more need you have for support personnel as well, and they cost money.
So, upgrades are something everyone should be ok with. If you use the software, expect it to be something you have to pay for once each year or two.
Of course, if you don't find the upgrade worthwhile, don't pay for it. But often times developers would love to give you free upgrades (i work for some) but it just isn't financially feasible. Without money, developers can't continue to work on your favorite apps.
I only say all of this because people always complain when an app costs more than an OS X upgrade now. $20 is not a lot... most Apple users can use OS X upgrades, they're good for nearly every user. But applications are on a much different priority scale. Some users value apps more than the OS, others don't. But Apple makes their profits on scale. Not all developers have the same scale of users and so they must charge more. Apple can also subsidize the cost of OS X with the rest of their business. Developers often only have one form of income, app sales.
Just food for thought.
