Pipe diffusers with several different geometries were designed for a highly loaded centrifugal compressor originally using a wedge diffuser. Parametric studies on the effect of pipe diffuser performance of a highly loaded centrifugal compressor by varying pipe diffuser inlet-to-impeller exit radius ratio, throat length, divergence angle, and throat area on centrifugal compressor performance were performed using a state-of-the-art multiblock flow solver. An optimum design of pipe diffuser was obtained from the parametric study, and the numerical results indicate that this pipe diffuser has remarkable advantageous effects on the compressor performance. Furthermore, a detailed comparison of flow visualization between the pipe diffuser and the wedge diffuser was conducted to identify the physical mechanism that account for the beneficial effects of the pipe diffuser on the performance and stability of the compressor. It was found that the performance enhancement afforded by the pipe diffuser is a result of the unique diffuse inlet flow pattern. Alleviating flow distortion in the diffuser inlet and reducing the possibility of a flow separation in discrete passages are the physical mechanisms responsible for improving the highly loaded centrifugal compressor performance.