In-use files not updated by MSI-installer (Visual Studio Installer project)
We had this problem, and the solution we came up with was to create two apps; the user app and an updater app. The MSI installs both. Each app checks if the other needs updating and, if it does, closes the other app, downloads the other app's updater, runs it, then relaunches the other app. Additionally, each app monitors if the other app is running and, if it isn't, launches it.
It would be useful to know more about your application and how you are doing the upgrade because:
You will normally see a FilesInUse dialog saying that files are in use, prompting the user to shut them down, but not if the install is silent.
Visual Studio setups have no built-in support for shutting down and restarting services, so if your app is a service you'll need extra work.
Files that actually do need to be replaced will prompt the user for a reboot (if they are not previously shut down) in order to replace them at reboot time.
So if you're not seeing reboot requests or FilesInUse dialogs in a UI install then something else is going on. So you need to be sure that:
a. You are really doing an upgrade where the version of the setup project has been incremented, the UpgradeCode is the same (and the ProductCode changes when you increment the setup project's version). Your symptoms could be the result of the upgrade not working and you're seeing just a repair.
b. The definition of "new version" is that you have an upgrade as in a., AND, the file versions of the binaries have been incremented. The default overwrite rules for installs require incremented file versions, so if they haven't been incremented you'll see no updates, and Windows will not attempt to show FilesInUse dialogs or reboot because there are no files that need replacing.