A series of Guardian articles is attempting to address that question. In the latest one, Elizabeth Edmondson makes a case for why "Genre fiction is no different from literary fiction."
She pulls together a few definitions:
"Literary fiction emphasises meaning over entertainment." (Venture Galleries blog)And, joy of joys:
"Literary novels are prose poetry … the subject of the work is engaged with something that might be called weighty … " (Dactyl Foundation)
"Literary Fiction is experienced as an emotional journey through the symphony of words, leading to a stronger grasp of the universe and of ourselves." (Huffington Post)And then takes on literary snobbery:
Lit fic: good. Popular, commercial, trash and pulp fiction: bad.
My own opinion is that you like what you like, and you write what you like, and there shouldn't be snobbery in either direction, but there is, in both direction. Ah the humanity.
Still, this is a good discussion. Follow it if you're interested.