We studied the PC software upgrade competition with Hotelling model. It shows that the upgrade pricing is affected by network externality, switch cost, and the quality of upgrade product. Many conclusions were drawn： （1） if users have rational expectations, the firm with larger net scale always prefers incompatibility, the finn with smaller net scale always prefers full compatibility; （2） the relevant factors are analyzed which affect version upgrade price, competitive price and full price; （3） the relationship between switch cost and competitive upgrade is explained; （4） the conditions are analyzed in which a firm can attract the rival＇s customers and analyze the strategies by which a firm can attract new customers. This paper is of theoretical importance for firms to make decision on competitive upgrade pricing