I'm pretty fresh out of high school, to be honest... lol. I just graduated in 2008! I know things have changed even in those four years.. but not THAT much.
Dresses really don't have to be that expensive. My parents gave me $100 toward my dress and they paid for my ticket sometimes (I went more than one year). If I wanted a dress that cost more than that, I could use money that I earned from working. If I didn't want to work, then I guess I could spend more than that!
I knew other girls who only bought dresses that were clearance-priced after prom season and then wore them the next year. I always found something at least on sale. I think my most expensive dress was $140. If you shop around, you can find something really truly nice for less than $200. Definitely. Although, from what I gleaned from girlfriends when I went off to college, it is a little harder to find something reasonably priced if you live in a big city (like NY/Chicago). As with all things in the city, I suppose...
So, I say set a price limit based on what you can afford and find reasonable... and then let your daughter moan and groan if she finds it unacceptable. I doubt she'll end up at the ball in a pumpkin carriage. ;)