From Shaun Walker himself (in another thread):

Install - contains just the run-time resources. Includes a web.config file. You should not use this version to upgrade an existing install unless you are very careful - because if you overwrite your previous web.config, you may lose access to your site membership. Includes Install versions of all Modules.

Upgrade - contains just the run-time resources. Includes a release.config and development.config. You can safely use this version for upgrading your site. However there is not automated utility for merging changes in the configuration files. Since there are nodes in the release.config and development.config which are new / required for DNN to function correctly, you will need to manually merge the applicable sections. This not a new step - it has been a requirement for any DNN upgrade all way back to version 1.0.0. Does not include any Module packages. The reasoning is that users do not always want to upgrade their modules when they upgrade the core.

From what Shaun writes, I deduce that if you use the Install package to do an Upgrade over a previous installation, you have to be careful you do not (1) Overwrite the web.config file; (2) Overwrite your existing database; (3) Overwrite Modules you would rather not update.

If you use the Upgrade package, you have to manually merge changes in the web.config file.  An upgrade will likely contain changes to the web.config file, changes required to have the new DNN version function properly.  But if you are unfamilar with the details of the web.config file and how to merge two versions of this file, you may have difficulty using the Upgrade package.

For me (unfamiliar with all that web.config does) this explains why my previous attempts to use the Upgrade package were less successful than when I used the Install package.  TheInstall package merges web.config changes for you (actually, when you copy the Install package over your current installion - per installation instructions - the web.config file from the Install package will contain the new version web.config file with required changes).

If like me you have not made any customizations to your Modules, you may choose to use the Install package to do your upgrades.  But before doing an Install package upgrade, make a complete backup of your current installation - especially your web.config file and DotNetNuke database.

You will have to merge one web.config file change yourself and there is no avoiding this step.

After your backup, make a copy of your existing web.config file, naming it: web.config.resources (as recommended in DNN documentation).  Next, copy the extracted contents of the Install package over your current installation - all folders/files EXCEPT the /App_Data folder and its contents.  Then, open web.config.resources and copy the Password HASH KEYS (MachineValidationKey & MachineDecryptionKey) into your copy/paste buffer.  Open the new web.config file and paste your HASH KEYS into the file, overwriting the default HASH KEYS.

You may also need to copy/paste your SiteSqlServer <connectionStrings> settings from the web.config.resources file to the new web.config file; that depends on what version of SQL Server (or MSDE) is running under your DotNetNuke installation.  For my SQL Server 2005 Express installation with standard connection settings, I do not need to copy/paste the SiteSqlServer <connectionStrings> settings.  But I MUST - and you should - copy/paste the HASH KEYS.

Using the Install package instead of the Upgrade package may prove for you, too, to be a smooth DotNetNuke upgrade path.  Just be certain you do not have any special Module modifications that will get overwritten when using the Install package to upgrade.