Using density functional theory and cluster expansion-based Monte Carlo simulations, we examine the effect of Pd dispersion on the energetics and barriers for the reaction of O(2) with H atoms to form H(2)O and H(2)O(2) on a AuPd/Pd(1 1 1) alloy surface. Our calculations show that this hydrogenation reaction is considerably affected by the distribution of Pd and Au atoms in the surface layer. In particular, on isolated Pd monomers surrounded by less active Au atoms, the activation barrier to form H(2)O(2) is appreciably lowered due to the suppression of O-O bond cleavage. In contrast, the reactivity to H(2)O on the Pd dimer is predicted to be enhanced compared to pure Pd. Using Monte Carlo simulations we also predict Pd ensemble populations in the AuPd surface layer as a function of temperature and composition. Due to the favorability of Au-Pd interactions over Pd-Pd, we find that small ensembles, particularly monomers, preferentially exist. This study highlights how theoretical investigation of bimetallic alloys, particularly the surface arrangement of atoms and the influence of ensembles on reaction energetics, can offer insight into the design of catalysts and tailoring of reaction conditions. (c) 2011 Elsevier B.V. All rights reserved.