I offer this reply in an effort to help clarify the question and will gladly delete it if it turns out my interpretation is not the intended one.
The desired procedure seems to be to symbolically differentiate a function involving various $y_i$, where $y_i$ symbolically represents the derivative of $y_{i-1}$ when $i \ge 1$. As described in the question, this can be carried out in two successive steps:
Differentiate the function. This is done with D.
Replace any instances of $y'_i$ by $y_{i+1}$:
augment[x_] := x /. {Derivative[1][Subscript[y, i_] ] :> Subscript[y, i + 1]}
The "and so on" seems to refer to repeatedly applying this procedure, presumably for a fixed number of times. Nest does exactly that; here is an example of its use in repeating the procedure $3$ times starting with $y_0(x)^2$:
Nest[augment[D[#, x] ] &, Subscript[y, 0][x]^2, 3]
$6 y_1(x) y_2(x)+2 y_0(x) y_3(x)$
Compare this to the third derivative itself:
D[y[x]^2, {x, 3}]
$6 y'(x) y''(x) + 2 y(x) y^{(3)}(x)$
Evidently, if we wished, we could avoid using Nest altogether and just apply a suitable replacement rule to this result to convert $i$th derivatives into subscripts $i$.