The variation of inlet gas volume fraction (IGVF) intensifies bubble breakup and coalescence behaviors, and the resulting evolution of gas pockets may directly impact the energy performance and stability of multiphase pumps. In this work, effects of IGVF on performance parameters, energy characteristics and flow instability are investigated by ANSYS CFX software. Bubble breakup and coalescence dynamics, along with their associated gas–liquid interfacial entropy production under high IGVF conditions are considered. Results show that predicted values of pressure increment, pressure fluctuation, and gas distribution characteristics agree well with experimental data. With the increase of IGVF, the pressure increment decreases while gas volume fraction (GVF) in the impeller and diffuser increases. When the IGVF rises from 5% to 15%, gas pockets form on the diffuser suction sides, accompanied by a sharp decline in pressure increment and rapid increase in GVF and average bubble diameter, ultimately triggering surge phenomena. The increasing IGVF accelerates bubble coalescence, leading to a higher proportion of large bubbles in the flow passages. Consequently, both the number and size of gas pockets increase, resulting in enhanced gas–liquid interfacial entropy production. Furthermore, pressure fluctuation characteristics are thoroughly analyzed, which can provide a reference for the energy loss analysis and optimal design of multiphase pumps.