The preferred route would be to convert the paid app to use in-app billing 
and make it free. But this can only be done once the suggestion here has 
been implemented:

http://code.google.com/p/marketbilling/issues/detail?id=17#c7

Then you could ditch the free version altogether.

However, please note that non-paid app countries (e.g. China and Taiwan) 
cannot see free apps that use in-app billing.

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