Instructions
When the PS3 was introduced to the world in November 2006, it came in two models--the 20GB and the 60GB--which could play both PS1 and PS2 games. However, PS3's manufacturer, Sony Computer Entertainment, scrapped both models in January 2007.
Sony replaced the scrapped models with another pair by the end of 2007--the 40GB and the 80GB. With these models, PS3s retained backward compatibility for PS1 games, but the ability to play PS2 games was drastically reduced. The 20GB and 60GB had the "Emotion Engine" CPU that was in the PS2 console, and thus enabled smooth PS2 game play. In contrast, the 80GB only had software emulation, which did not guarantee that all PS2 games would work; or if they did, have no problems during gameplay. The 40GB had no backward compatibility at all.
In 2008, Sony scrapped the backward-compatible 80GB altogether and replaced it with a version that does not play PS2 games. Today, the two PS3 models in production are the 40GB and 80GB versions, both of which only play PS1 games.
There are two main reasons Sony discontinued the manufacture of backward-compatible PS3s. One, the cost of making the consoles was outstripping the revenue made selling them. Two, the PS2 outsells the PS3, which indicates that there is still a viable market for the older console.
Some PS3 owners remain hopeful that there will be a future firmware update to enable the currently manufactured PS3s to play PS2 games, including by download via the PlayStation Store (an online virtual market that gives owners of certain PlayStation consoles the ability to purchase games). However, this might not happen as long as the PS3 continues to struggle to make a profit while the PS2 continues to sell in healthy numbers.