Usually it's due to a problem with the room which makes it uninhabitable, maybe an unplanned maintenance issue, etc.
If you have a studio, and the 1-B/R next door is not occupied, you will still keep the studio. DVC does not upgrade simply because a villa is vacant. It goes unused instead.
About the only "upgrade" I have ever heard of is those with BWV standard views reserved have been moved to preferred view rooms. The only problem is that some BWV owners don't look upon that as an upgrade at all.
This trip report link gives details of being upgraded from a 2 bedroom BW villa to a 3 bedroom Grand Villa - it looks (there are pictures) and sounds, wonderful! http://www.disboards.com/showthread.php?t=700596
We were upgraded to a preferred view BWV over this past Christmas. We reserved a standard view and were assigned a room over looking Luna Park pool with the Tower of Terror in the distance.
Never an upgrade, but I sure have been downgraded from my requests....I always book at 11 month window....I have never received what I have requested....View of Epcot...nope, I check in and get parking lot, etc.
We were given a free upgrade to a DCA view room at Paradise Pier Hotel at DLR when we stayed on points in March; it was a very nice surprise and saved us 10 points a night!
Never an upgrade, but I sure have been downgraded from my requests....I always book at 11 month window....I have never received what I have requested....View of Epcot...nope, I check in and get parking lot, etc.