Ordinarily I never recommend a wikipedia entry on a general topic, but the entry for literary fiction I think is good
http://en.wikipedia.org/wiki/Literary_fiction
Literary fiction, in general, focuses on the subjects of the narrative to create "introspective, in-depth character studies" of "interesting, complex and developed" characters
Plot
Literary fiction does not focus on plot as much as paraliterary fiction. Usually, the focus is on the "inner story" of the characters who drive the plot with detailed motivations to elicit "emotional involvement" in the reader.
Style
The style of literary fiction is often described as "elegantly written, lyrical, and ... layered".
Tone
The tone of literary fiction is usually serious and, therefore, often darker than paraliterary fiction.
Pacing
The pacing of literary fiction is slower than paraliterary fiction. As Terrence Rafferty notes, "literary fiction, by its nature, allows itself to dawdle, to linger on stray beauties even at the risk of losing its way."
Literary novelists are typically supported by patronage via employment at a university or similar institutions, with the continuation of such positions determined not by book sales but by critical acclaim by other established literary authors and critics.
. . . in the TALK tab (in this regard even more interesting than the article) and critical of the "Literary" tag. [I do not agree 100% of the following, but it has merit in counterpoint] :
I agree with the folks who are arguing that contemporary academic literary fiction as currently practiced is a genre (and is actually among the most rigidly formulaic of genres). One of my friends read submissions for a campus literary magazine, and he reports that the overwhelming majority of the stories submitted were about male English professors having affairs with female undergrads. That's not a formula? Off the top of my head, here are some of the conventions of literary fiction (particularly short fiction): 1) The piece will be contemporary social realism, 2) The protagonist will be an ordinary person, 3) The protagonist will be self-absorbed and self-pitying, 4) The protagonist will not get along with others in his or her social network, 5) The protagonist will spend a great deal of time thinking about the past, 6) The protagonist will come to an epiphany in which he or she grasps the essential truth of his or her situation, 7) The ending will be ambiguous, 8) The prose style will be cool and detached. Obviously not all literary fiction hits all of these points (just as not all science fiction is set in the future), but enough of it does to identify a few conventions, surely.