I would suggest that literary fiction and literature are very real and alive. There are three distinctions to be made. Genre fiction has the primary purpose of entertainment; literary fiction has the primary purpose of art, which is seen many ways. A very useful one, from John Gardner, is that art shares my dream so that it can become your dream. Method of engagement is a second distinction. Entertainment engages by predictability that creates comfortable excitement, and primarily uses the human curiosity of "What happens next?" Literature, according to E. M. Forrester, uses that technique of engaging the reader least among all. Lastly, literature can relate to or come from any genre, but does not fit in it.
Literary fiction falls into two useful categories. One is traditional fiction, where the author succeeds by maintaining the dream. The other is metafiction, in which the awareness of being fiction is in some way expressed in the fiction. this breaks the dream but develops other arenas of exploration to exchange ideas and perspectives on life and literature.
The sharing of dreams is difficult business. Few are interested in art; the entertainment of genre fiction is, well, more entertaining. It is hard, also, to evaluate artistic literature. But the effort is worth it - as a writer, to be able to share one's dreams, even if only with a few, is a rare gift. And, for the reader, it is a gift to receive the dreams of others.