K.S.
I know how you feel because I felt exactly the same way you do until my neice and my daughter decided they wanted to be in a pageant (they are both 7). The first thing I did was call the director and ask a million questions, and I quickly changed my mind. This particular pageant was run through the Miss America Organization. The girls competed in the local preliminary pageant and it was NOT focused on looks. It was judged on personality and stage presence. There were four areas of competition...interview, talent, athletic wear (instead of swimwear at this age) and party dress. The registration fee was $75 but otherwise I spent very little money. She wore a dress that I got off the clearance rack at Herberger's and I bought her a new outfit for her interview. Otherwise, she wore things she had at home. We also did very minimal make-up, just a little eye shadow and some lip gloss. They actually deducted points if the girls looked too "grown-up".
I think you can make this into whatever you want it to be. I know some of the mom's spent tons of money on dresses and paid for private dance lessons and everything. My theory was if I have to spend a ton of money just for her to win then I don't want her to win because I can't afford to keep up with it. I did not put any pressure on her and I told her beforehand that I will be very proud of her for going on stage and doing her personal best. And even on my meager budget she did win a title and will now compete at the state level. (At this age they do not compete at national level).
If this is something your daughter really wants to do then my suggestion would be to let her try it out. I don't know how many options you have in your area but do your research and pick one that you are comfortable with. Also, you can buy dresses very reasonable on ebay. I found one that my daughter will wear for state competition for about $30.
If you are interested in seeing some pictures of the outfits the girls wore just email me and I will send them to you. Good luck in whatever you decide to do.
And by the way, the benefits to this is it teaches girls to be comfortable on stage and when interacting with adults. It also builds their self confidence. The interview was done privately (not on stage) and they simply asked her about her hobbies and interests. She won a college savings bond along with several other prizes. The reason my neice wanted to do this was because she wanted to get over her stage fright so she could get a better part in the summer theater this year. Let me say again, this pageant was not a "beauty" pageant. It was a way to let little girls be little girls and be proud of it.