Playground:

from typing import Literal


def f(v: Literal['foo', 'bar', 'foo|bar']) -> None:
    ...

Expected behavior:

f('foo')        # Pass
f('bar')        # Pass
f('foo|bar')    # Pass
f('baz')        # Fail
f('foo|')       # Fail
f('|qux')       # Fail
f('foo|qux')    # Fail

Actual behaviour:

def f(v: Literal['foo', 'bar', 'foo|bar']) -> None:  # error: Name "foo" is not defined  [name-defined]
  ...

Environment:

• Mypy version used: 1.4/1.5/1.6/master branch.
• Mypy command-line flags: None.
• Mypy configuration options from mypy.ini (and other config files): None.
• Python version used: 3.8/3.9/3.10/3.11/3.12.

This bug is found by StackOverflow user Håkon T. at this question.

It seems that mypy would try to interpret any string containing a pipe (|) as a type, and in this case it failed.