Agents and editors have distinct preferences as to the type of stories they are willing to accept, so determining what category your story fits into will help you figure out where to submit it.
This type of story appeals to a wide audience, has a distinct plot, and its characters actively pursue a goal or overcome a challenge. These stories are primarily read for entertainment. There are many categories of commercial fiction, classified by genre and sub-genres. Each genre has basic elements that readers expect to see in the stories. Some commercial fiction may appeal to more than one type of audience, and can be considered mainstream.
These stories focus more on internal conflict than external events, the plot is less obvious, and there is an emphasis on artistic prose rather than the more straightforward storytelling seen in commercial fiction. There is usually extensive development of the characters, with a slower pace, and less emphasis on what happens and more on the character’s reaction to what happens.
Here’s an interesting explanation by Agent Nathan Bransford on the difference between commercial fiction and literary fiction: http://blog.nathanbransford.com/2007/02/what-makes-literary-fiction-literary.html
Robert J. Sawyer, a science fiction author, also gives a clear explanation of these categories: http://www.sfwriter.com/2008/02/literary-vs-commercial-fiction.html
Edit December 11, 2009:
Some books cross the line between commercial and literary fiction. See my post on upmarket fiction for more information.
Do you have a preference for reading one type of story? Do stories you write tend to fit more in the literary or commercial category?