If I compare a string literal to a string literal using the case statement, I get the expected behavior: if they are the same - it matches, if they are not - it does not.
Pattern matching in Haskell binds new variables. So when you write:
case x of
y -> ...
you have now bound a new variable 'y' to the value of 'x'. This is the trivial "pattern". You can see more clearly how the binding works when a constructor is involved:
case x of
(a, b) -> ...
Now a and b bind to components of the tuple. And so on for deconstructing and binding other data types. Thus, to match a string literal, you would write:
case x of
"def" -> ....
That's because the "case" isn't doing what you think it is. The "var2" that was set to "def" is not being compared with "var1". Instead you are getting a new scope containing a new "var2" that is bound to the value of "var1".
The reason for the error message is that as far as the compiler is concerned there is no difference between "var2 ->..." and "_ -> ...". Both match all possible values of "var1".
See Don's answer for why. A common idiom for doing what you are trying to do is this:
var1 = "abc"
var2 = "def"
foo x = case () of
() | x == var1 -> "Fail"
| x == var2 -> "Failzor"
| otherwise -> "WIN"
Of course in this case we would lose the case
and just write the guards directly on the function:
foo x | x == var1 = "Fail"
| ...
UPDATE
These days the MultiWayIf extension does this with slightly less syntactic noise.
{-# LANGUAGE MultiWayIf #-}
foo x = if | x == var1 -> "Fail"
| x == var2 -> "Failzor"
| otherwise -> "WIN"