where was this movie supposed to be set?

No particular place. It's a fictional/fantasy setting.

It is in fact based on a real location. However, the name “Daggerhorn” was slightly altered from the original “Douchenhorn.”

Nestled in the Bavarian Alps, close to the Swiss border, lies the Dabercrombie Mountains. The largest of these mountains, the infamous Douchenhorn, is home to the ethnic natives commonly known as Douches. Their customs are somewhat strange when compared to the surrounding German and Swiss villages. No lederhosen or Oktoberfest will be seen here. Instead, the savvy tourist will experience their ancient cultural dance known as the Diskotechentanz around a bonfire; the natives decked out in their traditional attire, known as the Dabercrombie Fitch- surprisingly modern and stylish outfits worn by woodsmen and blacksmiths alike.

The most startling feature of these quaint villagers, almost completely untouched by the modern world, is their native hairstyles. It has long been a mystery as to how they get their hair to stand on end in whimsical fashions which look oddly similar to the “Bed-head” look popular amongst today’s youth. As I mentioned on a different thread, the Faux-hawk was born in this very village.

The word “Douche” made its first appearance in the English language when the Baron Edward Hardy von Douchenborg toured London in 1629. He sported the traditional orange skin cream, gaudy “love-hate” banners adorned the familial skull symbol on his gilded tunics, and greasy spiked black hair made quite an impression on the English hosts. His stay was short lived- the Baron was exiled from England within a week of his arrival. Scholars believe it was due to his bombastic, cocksure personality common to Douches.