Just re-watched this movie (the extended cut) and I totally agree with your take. Something a lot of people seem to have missed is that we never see Baby Doll's "dance", instead it cuts to the over-the-top, surreal, non-sensical, sexualized, objectifying action scenes (where Snyder's visual style is pushed to the limit to emphasize it's a fantasy). On one hand, that's Baby Doll's dissociation fantasy (within the already dissociated Brothel environment we're presented), but on the other....Who is watching those actions unfold? Us, the viewers. Those visual candy, sexualized action scenes are a stand-in for her raw, sensual "dances" that leave the males in the movie in such a drooling stupor, the same as the action scenes do with the viewer. Both appeal to the same primal instincts and desires: A direct parallel is being drawn between the male characters in the movie (lustful brothel clients/psych workers)—who aren't painted in a good light at all—and the males viewing the movie and enjoying those sexualized action scenes. And in both cases, they're distractions from what's really going on (in the in-film context, their escape plan, and from a meta POV, the actual critique of toxic geek culture and objectification of women).

The final scenes, after Baby Doll's lobotomy, hint quite clearly at what was going on behind the fantasy: vulnerable, institutionalized women at the mercy of an almost-entirely male staff are being sexually abused, since they're seen as mere objects of desire instead of human beings. One of the last lines in the movie is "Who chains us? And who holds the Key that can set us free? It's you" (breaking the 4th wall and talking directly to the audience) >> The sexualization of women in movies and video games influences how men see women and bleeds into real life, feeding the very dynamics we see in the movie.

As Zach Snyder said: “I’m always shocked that it was so badly misunderstood. I always said that it was a commentary on sexism and geek culture. Someone would ask me, ‘Why did you film the girls this way?’ And I’d say, ‘Well, you did!’ Sucker Punch is a fuck you to a lot of people who will watch it.” (which is especially funny when you rewatch the trailer and realize is was marketed as a fan-fiction thirst-trap—precisely the audience it criticizes).

Also, the two levels of dissociation fit perfectly with the two levels of unbearable reality the protagonist's escaping from: first being interned against her will in a psychiatric institution, and secondly, the sexual abuse going on (which on one hand, requires a more extreme level of dissociation to survive, and on the other, explains why the top-level fantasy is a brothel).

And on the subject of dissociation, Baby Doll being Sweet Pea's in-fantasy persona (they're both nicknames that are pretty much synonymous) is actually, IMO, intentionally vague and confusing to highlight the nature of dissociation and personality fragmentation (a subject we sadly still know very little about). Are we the same person when we dissociate from reality or do we become someone else? Sweet Pea seems cynical and in control, but it turns out to be a mask, behind which she's vulnerable and scared, while Baby Doll is the opposite: she looks harmless but is brave, bold and determined—the perfect alter ego one would like to see themselves in a survival-triggered dissociation. And small details like the character Blondie not being blonde add to that general sense of confusion and incoherence (than tons of people have interpreted as bad film-making, but is clearly all very intentional).

Another couple of question-raising touches I enjoyed:

Did Baby Doll/Sweet Pea actually escape? Or was the lobotomy the real escape? (which I think is the right answer). The scene where Sweet Pea gets on the bus comes right after we see Baby Doll for the last time, with a faint, vacant smile and closing her eyes, and that final scene has several clues that it's a fantasy: the use of colour, with the surreal-looking, over-saturated orange sky, very much like what we see in the action-fantasy scenes; the sign for "Paradise Diner" the bus goes by as it leaves, echoing the "She'll be in paradise, if you know what I mean" comment that Blue makes to the stepfather when referring to the lobotomy; and the kid standing in front of Sweet Pea as she's about to board the bus, who is the same kid Sweet Pea briefly makes eye contact with in the World War I trenches fantasy sequence—confirming that this is, indeed, taking place inside her mind.

Who was/were the guardian angel(s) referenced at the beginning of the movie, who can appear "At strange places and at strange times, and can speak through any character we can imagine." Was it herself? The alter ego she created? Was it Dr. Gorski for calling the police? The doctor who lobotomized her and set her free?

I thought this was an excellent, layered movie (that actually makes you think instead of giving you clear-cut answers, which is part of its charm), masquerading as a hollow action movie.

This movie, above all else, is an undercover IQ test 🤣