If I have a 2.0 version of MyProduct installed through an MSI, is it possible to execute the MSI for an earlier 1.0 version of MyProduct and cause a "product downgrade?" Or does Windows Installer only handle upgrade stories?
Downgrades are supported. You can use the Upgrade table to define custom upgrade rules. For example, the 1.0 version should have an upgrade rule which covers all versions (including 2.0), not just versions lower than 1.0.