What he means is if you go into Arcade Mode and select a track, it gives you three difficulty levels to choose from.
A is the easiest. C is the hardest. I'm fairly certain that it effects the level of the AI drivers and I think it might also be a car class range. If I'm correct, you'll race against lower HP cars in A, but against race cars and super cars in C.
Honestly, except for doing the Time Trial for the PSN Trophy, I haven't played around in Arcade mode much. I'm sure someone around here knows more about it than I do and can give you a definitive answer.