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Here's where it gets fun:
iPods used to be under the PRPs, in which case if the unit was fouled up, other than physical / accidental damage, you would get a store-credit voucher equal to what you had paid at the time. You can then apply that towards any product of your choosing. Meaning you can pay the difference and get a higher end one if you so choose.
iPods then later switched over to the PSP. It gets a little bit less fun. Under the PSP, your iPod must be sent out to a service center, and again it can not be from physical / accidental damage (water, dropping, etc). The service center will then attempt to service the item. If it is economical, the service will be completed and the iPod will be shipped back to the store. If whatever repairs that are needed are not economical, the service center will give the store an RA number, contact you, and then you will be able to come into the store for a new item.
The last thing though is that the PSP does have a no lemon policy. If, after servicing it 3 times, you bring it in for a fourth repair, it will be sent out to the service center for them just to make sure it's a PSP covered problem, and then they will send an RA number to the store and you can swap out the item for the closest matching product under the PSP.
Now, on both cases of either the item not being economical for a repair, or if it's a PSP swap under the No Lemon policy, it may be possible to pay for the difference and upgrade to a new model. That is more than likely going to depend on who you deal with at the store. I do not think it is written into the PSP anywhere specifically, but I know it to have been done in the past.
The real game comes when figuring out the "price" difference, as of course, prices fluxuate over time. So, if you do go in and it is a PSP and you have met a condition where you can swap it, definitely ask and say you are more than willing to pay the difference and upgrade to a higher model. Here is what really helps-- tell them you will buy the PSP on the new item. I'm serious, it will. Managers in some stores will sometimes be a bit more leniant if they know you are going to be buying the service with the item as well.
As always though, just make sure damage you are trying to get fixed is stuff covered by warranty and that it's something a service center can reproduce (as they can and will attempt to diagnose your problem... they don't just fix what is said is wrong with it). Even under your PSP, if a unit is sent back with "No Fault Found", you will get charged a $24.95 shipping / services fee at most locations. Again, things not covered are going to be physical / accidental damage, things like spilling water into it, etc. If you've got a clicking hard drive, but a huge dent in the case right over the hard drive, chances are the service center may try to pin this damage on you :p.
Anyways, I hope that info can be of some use to you. You can probably guess as to why I know so much about it ;)
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