I was reading the Wikipedia article on "genre fiction" recently (and it's pretty bad, so I won't link or recommend it), when it occurred to me that maybe we see the same division in fiction that we see in music.
There are basically three kinds of music. There's Music with a capital M, the kind that gets taught in the Music departments of universities; I've heard it called "art music" and "serious music," both of which have built-in value judgments, and I've heard some credible claims that at the moment the most value-neutral term is "erudite music," but that's obviously value-laden too, and the very fact it's hard to name this category without sounding like a snob, is a big clue to the definition of the category. It's clear that Music with a capital M is a legitimate art form; but it's not accessible in the same way as the next category: popular music, which (and again I'll sound snobby by saying this) is the music that people actually listen to. And then there's traditional or folk music; I've heard that defined as music for which the author is unknown, but that definition has problems. If I find out who wrote a song, does it magically stop being folk? In a world where good records of things are generally kept, does that mean no more folk music can ever be created? I prefer the definition that folk music is music that at least appears to be made by ordinary people - folks - for their own entertainment, instead of being made by professionals. This division into three categories usually works pretty well. You can reliably figure out which category any given music is in; there's some overlap among the categories but not enough to render them useless; and nearly all music fits into one of the three.
Can we use equivalent categories for fiction? It seems to me that the "literary" or "genre" distinction for fiction parallels the "erudite" or "popular" distinction for music. We've got scholars in universities studying Literary fiction with a capital L and mostly turning up their noses at genre fiction - but genre fiction is the fiction people actually read. Then if the analogy holds, there should be a third category, the fiction equivalent of folk or traditional music. Is it fairy tales, flowing from the definition of traditional music as old music without an author attribution? Is it fan-fiction, flowing from the definition of music made by ordinary people?