In this case piefed and lemmy are basically compatible, so the communities can have a mix of the two. For example, the OP posted this with piefed, and you replied to it with presumably lemmy. So it may divide up developer effort a bit, but the community isn't divided.

Just learned about Piefed. Why does it exist when we already have Lemmy, which alone is already too small for niche communities to pop up as-is?

Because some people had ideological differences with some of the Lemmy Devs. So instead of using the software as it's supposed to be used, and simply defederating from instances they didn't like, they went and made their own software which effectively does the same thing as Lemmy.

I guess I don't mind that there's diversity in the Fediverse ecosystem, but at the same time, I feel like the people most adamant about pushing Piefed are doing so, because they want to be in an ideological echo chamber, as opposed to actually furthering the cause of federated social media, and open-source software.

That's open source for you. The biggest issue for things gaining traction is a million projects that all do the same thing "better". Look at Linux, if people are curious about "switching to Linux" all it takes is one comment thread somewhere to confuse then enough to bail on the idea.

It doesn't fracture anything, it is basically a Fediverse reader/writer. It's like opening a txt file in vim, emacs, or nano, they all read and write to that file type at the end of the day. Don't forget, there's also Kbin.