It's not either or though is it. You and some other Arsenal fans are really coming across very obtuse about how abstract psychological power dynamics work. I mentioned it on another post but it's like saying "do Real have an unmatched pedigree in the CL or did Neuer just drop a clanger?" or if we go back to Fergie time and pick out any late winner we scored "do United have a mental edge when it comes to getting late wins or did -insert example of whoever's fault was for that specific goal-"
Man City already do have a mental belief that they are the best. It comes as you say from winning so much and dominating for so long. Their run as someone pointed out was actually similar to Arsenal when they played and yet, the narrative was that Arsenal was the team in form. I am not saying Arsenal lost the title at the Etihad because they didn't win. They still could have won it despite that draw, many other factors play into a title run in. Injuries, specific moments that could go either way like Arsenal's first half chances vs Villa or Son's miss vs City. There are so many factors at play that it's impossible to point out to one single event.
What I am trying to say though, is that Arsenal had a big chance to shake off that City's mental resilience and confidence they built over the years. Their aura of invincibility and that they are the best in the land was there to be dented. I and many believe so because Arsenal looked to be good enough for the first time in many years. I never thought Arsenal were good enough last year but this year, they looked like they could go to City and make City feel they're no longer sure they are the best team in the league. I am not talking about winning or losing here and as in a one off game, anything can happen. I am talking about the feeling you get after a game that one team played you like equal as opposed to one team changed everything they've been doing to accomodate because they are afraid of you. That message consolidated to City that they are still the main team everyone else has hope and pray to manage. Was that what won them the league and why Arsenal lost it? No. But it was in my view a huge chance to gain momentum from Arsenal's point of view that could have been enough to make the difference at critical moments.